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Top Trader Richard Dennis and the Turtle Trading Strategy

Legendary trader Richard Dennis turned ordinary men and women into top-class traders by teaching them everything he knew about trend-trading. Learn the rules of his system below. Also find out whether this strategy is still relevant today.

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Updated: Sep 26, 2022

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What if someone plucked you off the street and made you a millionaire?

That’s what Richard Dennis did for a few lucky men and women, by teaching them to trade the markets.

There’s are many ways to trade the market and here you can learn all the investing techniques. For instance, one can trade stocks, currencies (forex), or commodities (gold, silver, oil). Richard Dennis was a futures trader. The “Prince of the Pit” made $80 million in 1986, on his way to amassing a personal fortune of $200 million; because of that, the name Richard Dennis was thrown around with the likes of billionaire hedge-fund manager George Soros and junk bond king Michael Milken.

Those riches didn’t come easy, Dennis was notorious for experiencing intense amounts of volatility. He could be down as much as $10 million in a single day! Unlike other traders who took short term trades, Dennis held on to his positions for longer while riding out the market fluctuations.

Unfortunately, Dennis held on a bit too long between 1987 and 1988, as he lost over 50% of the assets he managed. Richard Dennis largely stepped away from trading after this, but the end of this career isn’t the major takeaway from his story. He taught a handful of people how to trade successfully, and some of them are doing well today. How he made the money is still important, and can be combined with other risk management protocols to help control losses.

The Turtles

While Dennis is known for making and losing a lot of money, he’s also known for something else–an experiment. He took a handful of men and women from obscurity, and taught them to trade futures. According to a former student, these so-called Turtle Traders went on to earn profits of $175 million in 4 years, or an 80% compounded rate of return.

By his own admission in the iconic trading book Market Wizards, all these people were thoroughly screened beforehand. In other words, they were deemed to have an aptitude for following the trading system that would be presented to them. It is one thing to know a strategy, it is a totally different thing to be able to implement it successfully.

The craziest thing: it all stemmed from a bet between Dennis and his partner William Eckhardt. William believed that successful traders had innate gifts and talents while Richard Dennis believed good traders were made, not born.

To settle the bet, Dennis set up an experiment.

Dennis placed ads in the Wall Street Journal and the New York Times. He got over 1000 applicants, out of which he selected just 10. A few people he already knew were added to the group of 10, bringing the final total to 13. After a short training period, the Turtles were given trading accounts funded with Dennis’s own money (on average about $500,000 to $2,000,000 per trader, but this varied drastically depending on the student). He called them turtles because of an experience he had in Singapore, where he saw turtle farms efficiently raising and growing turtles. He decided he would be able to raise his students just as efficiently.

The Turtle Trading System

Successful traders rely on the use of systems, or a trading plan for success. By creating rules for the process of trading, successful traders are able to remove the element of human unreliability. A computer does what it’s programmed to do. A human might balk at the prospect of holding onto a trade that’s losing millions of dollars, even if it’s the right thing to do, based on a system that tends to win over the long-run.

The turtles were taught how to implement a trend-following strategy. It’s a type of trading strategy where you attempt to ride the momentum of an asset, whether it’s trending up or down. Trend-followers are like the surfers of the trading world, waiting in the sea for just the right wave to ride. You just have to make sure you get off the wave before it crashes you on the rocks.

The Turtle Trading system was a rules-based system. Follow the rules, and you’ll succeed (whether it still works is discussed at the end). It covered every aspect of trading, including what to trade, how much to buy or sell and when to get out of a winning or losing positions.

Over the next four years, the Turtles earned a compound annual growth rate of 80%. At that rate, $500,000 turns into more than $5 million over 4 years.

Here’s how they did it.

What Turtles traded

The turtles traded in large, liquid markets. They had to, due to the size of the positions they were entering into. They basically traded all these liquid markets except for meat and grains.

Grains were off-limits because Dennis himself was maxing out his trading account. A trader is limited on the number of options or futures they can have, and that meant there were none left for the turtles, who were trading under his name.

Here’s an idea of what the turtles did trade:

10 & 30 Year U.S. Treasury Bond and 90 Day U.S. Treasury Bills.
Commodities like coffee, cocoa, sugar, cotton, crude oil, heating oil and unleaded gas.
Currencies like the Swiss Franc, British Pound and Japanese Yen and Canadian dollar.
Precious metals like gold, silver and copper.
They also traded index futures, such as the S&P 500.

One interesting note is that if a trader decided not to trade a commodity within a market, then they were to eschew that market entirely. So if one of the turtles didn’t want to trade crude oil, then they were supposed to stay away from everything else in that market, like heating oil or unleaded gas.

Turtle Position Sizing

The Turtle Traders used a sophisticated position sizing algorithm. They would adjust the size of their position based on the volatility of the asset. Essentially, if a turtle amassed a position in a high volatility market, it would be offset by a position in a lower volatility one.

The formula Dennis provided helped them figure out how much of each contract they should have. In high volatility markets the turtles would inevitably have smaller amounts, and larger amounts of contracts in lower volatility markets.

Even if the volatility was lower in a market like Eurodollars, there was potential for big gains due to the relatively larger position that would be accumulated.

The formula is based on “N”, which is the 20-day exponential moving average of True Range. A 20-day ATR reading could also be used.

Once N is known, then calculate Dollar Volatility = N x Dollars per Point.

For example, on an S&P 500 e-mini contract, one point of movement on one contract equates to a $50 loss or profit, so if N is 20, the Dollar Volatility is $1000.

Turtles built positions in “units” where a Unit = 1% of Account / Dollar Volatility

Assume a trader with a $200,000 account is trading the S&P 500 emini, based on the above conditions. 1% of $200,000 is equal to $2000.

Unit = $2000 / $1000 = 2.

This means that 2 contracts is equal to one unit, for the emini S&P contract, based on an N of 20. The units for other markets will vary, and the unit value for the S&P emini will also fluctuate as N changes over time.

Turtles were limited on how many units they could accumulate (and remember, how many contracts are in a Unit will vary based on the market being traded, and on N), as they added to positions as they became more profitable.

A single position was limited to 4 units. If holding multiple positions in markets that were closely correlated, the trader could have a maximum of 6 unites in all the combined positions. For holding position in multiple loosely correlated markets, the Turtles could have a total of 10 units. As a more overarching rule, Turtles were allowed a maximum of 12 units in any one direction (long or short).

How Turtles Entered Trades

Knowing when to enter a position is important. Surprisingly, the turtles used two very simple entry systems.

System 1: Short-term system based on 20-day breakout. The Turtles entered (one unit) when the price moved above the high of the last 20 days, or dropped below the low of the last 20 days. The trade was skipped if the prior signal was a winner (the price went 2N against the position, before triggering a 10-day profitable exit, discussed in the Exit section).

System 2: Longer-term system based on 55-day breakout. The Turtles entered (one unit) when the price moved above the high of the last 55 days, or dropped below the low of the last 55 days. This breakout method was used in case the 20-day breakout was skipped for the reasons mentioned above.

The turtles end a trade on the breakout, and always did so before the daily close of the markets. A breakout is when the price of an asset “breaks” through the high or low of a certain number of days.

They were also told to be extremely strict about following the system rules, because even missing one or two winning trades in a year could totally change the complexion of their returns.

Adding to Positions

The Turtles used something called pyramiding, which is taking a larger position as the price moves favorably. Once in a trade (whether based on the 20 or 55-day breakout), Turtles added one unit to the position each time the price moved 1/2 N in their favor. This is based on the transaction price, and not the actual breakout price (since there could be a difference).

Assume a trader entered the the S&P 500 e-mini contract at 1500, based on an N of 20 (for example), 1/2 N is 10 points. 1 unit was purchased as 1500, another unit is added at 1510, another unit added at 1520, another at 1530, etc. As N changes from week to week, the 1/2 N value will also change.

How Turtles Exited Positions

At the outset of each trade, a stop loss is placed 2N below the entry price if long, or 2N above the entry price if short. This served to cut losses if the price doesn’t move favorably after entry.

If new positions were added (at each 1/2N favorable move) then the last stop loss was also moved by 1/2N. This typically means that the stop loss will always be 2N away from the most recent entry (although it could vary slightly based on slippage).

There was another stop loss method called the Whipsaw. With this technique, the stop loss was placed at 1/2N away from the entry point.

If the price doesn’t hit the stop loss, then the system 1 and system 2 exit methods are used.

The Turtles used an N-based system to exit their positions.

For system 1, the exit was a 10 day low for long positions, and a 10 day high for short positions.

For system 2, the time period was extended to 20 days for both long and short positions.

It takes a lot of discipline to wait for a 10 or 20 day low before exiting a position. There’s a strong urge to exit earlier but the Turtle Trading system is adamant that holding on can make the difference between making millions and losing money. Avoiding the urge to get out (but still sticking to a system) is what results in the huge gains.

Is the Turtle Trading Strategy Still Relevant Today?

The Turtle Trading system devised by Richard Dennis worked very well for traders in the 80’s. The question is whether or not it would work today.

Turns out, it probably would not.

Trading Blox backtested the Turtle Trading System and found that returns were completely flat between 1996 and 2009.

What is incredible is that they found that the system generated returns of 216% between 1970 and 1986- the exact period when Richard Dennis was using it. That dropped to 10.5% from 1986-2009.

So it’s entirely possible that the Turtle Trading system was perfect for the era that Dennis was using it, or that the turtles were just lucky, or perhaps both. The system doesn’t work in the modern era (at least not in its original form), which could just mean that the markets changed and the system needs to be updated to reflect the new reality.

On the other hand, Trading Tuition tested a Donchian trend following system and found that it performed quite well over a 12 year period spanning 2004 to 2016. The test reported returns of 20-30% with max drawdowns of 17-40% depending on the index being traded. Those drawdowns aren’t great for that return, but at least it was profitable. Seeing as Richard Dennis’ rules were themselves inspired by Richard Donchian’s (considered the father of trend-following) teachings, this lends credibility to the idea that, while the Turtle Trading system may be out of style, there’s still room for a trend-following system in 2018 and beyond.

Also, it reveals that small tweaks in the system can have a profound impact. It is highly likely that the Turtle Trading strategy still has relevance, it just must be adjusted to accommodate today’s often choppier market movements. Trends still occur, and there are lots of methods and courses that take advantage of them.

A number of indicators have been developed based on the Turtle Trader method. And depending on how those indicators are setup they can still produce profitable trading opportunities, especially during trending periods. Of course, when the market isn’t trending that is when more losing trades happen. Therefore, if using a system like this, it is recommended that traders have some sort of filter on their trades to help them stay out of choppy conditions…which can last for long periods of time. The chart below shows a Turtle Indicator available for free download in the MetaTrader Market Place.

Richard Dennis and Turtle Trading Strategy – Conclusion

A group of new traders managed to make huge profits following a rules-based trend following system. Some went on to even greater success. Original Turtle Trader Jerry Parker went on to found Chesapeake Capital Management, which has outperformed the S&P 500 since 1988 with an annualized compound return of 11.61% (as of March 2017).

The strategy worked very well in Dennis’s era, but would require some tweaking for it to be effective now. That said, trends still happen which means there are lots of opportunities for the trend trader.

It seems great traders can be made after all.

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