In 1983, the legendary commodity trader Richard Dennis conducted an experiment that would go down in financial history. Dennis, along with his partner William Eckhardt, debated whether great traders were born or made. To settle this, Dennis selected 23 novice individuals from diverse backgrounds and trained them in his systematic trading approach.
The novices, nicknamed “Turtle Traders,” were given Dennis’s own money to trade, turning the experiment into a real-world test of his theories. Over five years, these novice traders reportedly made over $175 million combined, proving that with the right training and mindset, ordinary people could achieve extraordinary success in the financial markets.
Key Takeaways
- The Turtle Traders experiment was designed to prove that trading success can be taught.
- Richard Dennis selected 23 novices with diverse backgrounds for the experiment.
- The novices were trained in a systematic trading approach and given Dennis’s money to trade.
- The experiment resulted in the novices making over $175 million in five years.
- The success of the Turtle Traders proved that ordinary people can achieve extraordinary success in financial markets with proper training.
The Famous Wall Street Bet That Started It All
The story of the Turtle Traders began with a bet between two renowned traders, Richard Dennis and William Eckhardt. Their debate centered on whether successful trading was a result of innate talent or proper training.
Richard Dennis vs. William Eckhardt: Nature or Nurture?
The philosophical disagreement between Dennis and Eckhardt sparked the Turtle Trading experiment. Dennis firmly believed that trading success could be taught to anyone willing to follow a systematic approach. In contrast, Eckhardt maintained that Dennis possessed special talents that couldn’t be easily transferred.
From $5,000 to $100 Million: The Trading Legend
Richard Dennis’s own trading journey was remarkable. He transformed a modest initial stake of less than $5,000 into more than $100 million by the early 1980s, establishing himself as a trading legend on Wall Street. This success story is a testament to his disciplined approach to commodity trading on the Chicago Mercantile Exchange during the 1970s and 1980s.
| Trader | Initial Investment | Final Amount | Years |
|---|---|---|---|
| Richard Dennis | $5,000 | $100 Million | Early 1980s |
The famous Wall Street bet proposed by Dennis was not just about testing his beliefs but also about challenging conventional wisdom on what it takes to achieve success in the financial market. The experiment would change the lives of the participants and provide valuable insights into the world of trading.
Selecting the Turtle Traders
In a groundbreaking experiment, Richard Dennis placed an ad in The Wall Street Journal to recruit novice traders. This marked the beginning of a journey that would change the lives of many. The ad attracted thousands of applicants eager to learn from acknowledged masters in commodity trading.
The Wall Street Journal Ad That Changed Lives
The advertisement placed by Richard Dennis was a call to action for many who were interested in trading but lacked the knowledge and experience. “The big money in trading is made when one can get long at lows after a big downtrend” was one of the concepts that would be tested during the selection process, though this particular statement was marked as false, indicating the complexity of the questions asked. Thousands applied, but only a handful would make it through the rigorous selection process.
The Selection Process: Finding the Right Mindset
The selection process was designed to identify individuals with the right psychological makeup. Dennis used a series of true-or-false questions to assess candidates’ understanding of trading concepts like trend following and risk management. For instance, the statement “On initiation, one should know precisely where to liquidate if a loss occurs” was marked as true, highlighting the importance of risk management. Only 14 traders made it through the first “Turtle” program, with a second group added later, creating a diverse group of novices who would be taught Dennis’s systematic approach to the markets.
As Richard Dennis once said,
“I always thought that one could teach someone to be a good trader.”
This belief was put to the test through the Turtle Traders experiment, which aimed to prove that trading could be taught to anyone with the right mindset.
Inside the Turtle Trading System
At the heart of the Turtle Trading experiment was a sophisticated trading system that emphasized trend following and risk management. This system was designed to be comprehensive, covering every aspect of trading.
The Core Trend-Following Strategy
The Turtle Trading system was based on the principle that “the trend is your friend.” This meant that Turtles were taught to buy futures breaking out to the upside of trading ranges and sell short on downside breakouts. The strategy relied on identifying and capitalizing on market trends.
Entry and Exit Rules: When to Buy and Sell
Entry signals were mechanical and objective, such as buying when prices made new four-week highs. This approach eliminated emotion and guesswork from trading decisions. Exit rules were equally systematic, with traders closing positions when prices moved against them by a predetermined amount or when the trend appeared to be ending.
Risk Management: The 2% Rule
Risk management was paramount in the Turtle system, with the famous “2% rule” stipulating that traders should never risk more than 2% of their account value on a single trade. The system also included rules for position sizing based on market volatility, ensuring that traders took larger positions in less volatile markets and reduced exposure in more volatile ones.
| Key Components | Description |
|---|---|
| Trend Following | Identifying and capitalizing on market trends |
| Entry and Exit Rules | Mechanical and objective rules for buying and selling |
| Risk Management | The 2% rule and position sizing based on market volatility |
The Remarkable Results of the Experiment
The Turtle Trading experiment, led by Richard Dennis, yielded extraordinary results that challenged conventional wisdom on trading. The experiment’s success was a testament to the effectiveness of systematic trading practices.
$175 Million in Five Years: Breaking Down the Success
The two classes of Turtles trained by Dennis collectively earned more than $175 million in just five years, demonstrating that trading could be taught and that significant returns were possible with the right training and practice. This achievement was remarkable given that most participants had no prior trading experience.
- The experiment proved that systematic rules and proper training could overcome a lack of experience, leading to substantial success in the markets.
- The Turtles’ performance showed that with the right mindset and training, individuals could achieve significant financial gains through trading.
The Challenges: Drawdowns and Psychological Hurdles
Despite the significant money earned, the Turtles faced considerable challenges, including deep drawdowns that tested their psychological resilience. Trend-following strategies, like the one used by the Turtles, typically have a success rate of only 40-50%, meaning traders must endure numerous losing trades before achieving substantial gains.
- The experiment highlighted the importance of psychological strength in trading, as maintaining discipline during periods of account decline was a significant hurdle.
- The varying degrees of success among the Turtles underscored the role of individual differences in discipline, risk tolerance, and psychological makeup in influencing trading outcomes over time.
Richard Dennis’s experiment demonstrated that while technical skills are crucial, the psychological aspect of trading is equally important for long-term success in managing an account over several years.
The Legacy of the Turtle Traders in Modern Markets
The legacy of the Turtle Traders extends far beyond their initial success, shaping the way modern traders approach the markets. The experiment, which began in the 1980s, not only proved that trading skills could be taught but also laid the groundwork for modern trend-following strategies.
Notable Turtle Success Stories
Jerry Parker, one of Richard Dennis’ top Turtle Traders, stands out as a notable success story. He founded Chesapeake Capital and has continued to apply the trend-following principles he learned from Dennis. Interviews with original Turtle Traders have shed light on their experiences and the strategies they employed.
Other Turtles have also achieved significant success, establishing their own trading careers and investment firms. The success stories of these traders serve as a testament to the effectiveness of the Turtle Trading system.
Can the Turtle Strategy Work in Today’s Markets?
The question of whether the Turtle strategy can work in today’s markets remains a topic of debate. Market conditions have changed significantly since the 1980s, with the rise of algorithmic trading and increased market efficiency. However, many modern traders have adapted the core principles of the Turtle system to contemporary markets, suggesting that while specific parameters may need adjustment, the fundamental approach remains valid.
The Turtle Trading experiment’s enduring legacy lies not just in the specific rules taught but in demonstrating the importance of systematic trading, risk management, and psychological discipline. Today’s traders continue to find value in the timeless principles of trend following, position sizing, and risk management that the Turtles employed.
Conclusion: Lessons from the Turtle Trading Experiment
The legacy of the Turtle Traders continues to influence modern trading practices. Richard Dennis’s experiment conclusively showed that trading success is not innate but can be taught through disciplined execution and adherence to systematic trading rules.
The key lessons from the Turtle experiment include the importance of strict risk management and position sizing based on volatility. These principles, along with psychological discipline, enabled novice traders to achieve significant returns.
The Turtle Traders’ success challenges the notion that market success requires special talent, instead highlighting the importance of proper methodology and discipline. Even decades after the original experiment in the 1980s, the Turtle Trading principles remain relevant, influencing traders worldwide.
Ultimately, the Turtle Traders story demonstrates that financial success is accessible to those who approach the markets with the right combination of knowledge, discipline, and psychological preparation.
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