the trades that the Turtles made resulted inlosses. If the winning trades did not earn enough on average to offset theselosses, the Turtles would have lost money. Every profitable trading systemhas a different optimal exit point.Consider the Turtle System; if you exit winning positions at a 1 N profitwhile you exited losing positions at a 2 N loss you would need twice asmany winners to offset the losses from the losing trades.There is a complex relationship between the components of a tradingsystem. This means that you can’t consider the proper exit for a profitableposition without considering the entry, money management and other factors.The proper exit for winning positions is one of the most importantaspects of trading, and the least appreciated. Yet it can make the differencebetween winning and losing.
Turtle ExitsThe System 1 exit was a 10 day low for long positions and a 10 day highfor short positions. All the Units in the position would be exited if the pricewent against the position for a 10 day breakout.The System 2 exit was a 20 day low for long positions and a 20 day highfor short positions. All the Units in the position would be exited if the pricewent against the position for a 20 day breakout.As with entries, the Turtles did not typically place exit stop orders, butinstead watched the price during the day, and started to phone in exit ordersas soon as the price traded through the exit breakout price.
These Are Difficult ExitsFor most traders, the Turtle System Exits were probably the single mostdifficult part of the Turtle System Rules. Waiting for a 10 or 20 day new lowcan often mean watching 20%, 40% even 100% of significant profits evaporate.There is a very strong tendency to want to exit earlier. It requires greatdiscipline to watch your profits evaporate in order to hold onto your positions for the really big move. The ability to maintain discipline and stick tothe rules during large winning trades is the hallmark of the experiencedsuccessful trader.
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Chapter 7TacticsMiscellaneous guidelines to cover the rest of trading the Turtle SystemRules.The famous architect Mies van der Rohe, when speaking about restraint indesign, once said: “God is in the details.” This is also true of trading systems.There are some important details which remain that can make a significantdifference in the profitability of your trading when using the Turtle TradingRules.
Entering OrdersAs has been mentioned before, Richard Dennis and William Eckhardtadvised the Turtles not to use stops when placing orders. We were advisedto watch the market and enter orders when the price hit our stop price.We were also told that, in general, it was better to place limit ordersinstead of market orders. This is because limit orders offer a chance for betterfills and less slippage than do market orders.Any market has at all times a bid and an ask. The bid is the price thatbuyers are willing to buy at, and the ask is the price that sellers are willingto sell at. If at any time the bid price becomes higher than the ask price,trading takes place. A market order will always fill at the bid or ask whenthere is sufficient volume, and sometimes at a worse price for larger orders.Typically, there is a certain amount of relatively random price movementthat occurs, which is sometimes known as the bounce. The idea behind usinglimit orders is to place your order at the lower end of the bounce, insteadof simply placing a market order. A limit order will not move the market ifit is a small order, and it will almost always move it less if it is a larger order.It takes some skill to be able to determine the best price for a limit order,but with practice, you should be able to get better fills using limit ordersplaced near the market than with market orders.
Fast MarketsAt times, the market moves very quickly through the order prices, and ifyou place a limit order it simply won’t get filled. During fast market conditions, a market can move thousands of dollars per contract in just a fewminutes.During these times, the Turtles were advised not to panic, and to waitfor the market to trade and stabilize before placing their orders.Most beginning traders find this hard to do. They panic and place marketorders. Invariably they do this at the worst possible time, and frequentlyend up trading on the high or low of the day, at the worst possible price.
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In a fast market, liquidity temporarily dries up. In the case of a risingfast market, sellers stop selling and hold out for a higher price, and they willnot re-commence selling until after the price stops moving up. In this scenario, the asks rise considerably, and the spread between bid and ask widens.Buyers are now forced to pay much higher prices as sellers continueraising their asks, and the price eventually moves so far and so fast that newsellers come into the market, causing the price to stabilize, and often toquickly reverse and collapse partway back.Market orders placed into a fast market usually end up getting filled atthe highest price of the run-up, right at the point where the market beginsto stabilize as new sellers come in.As Turtles, we waited until some indication of at least a temporary pricereversal before placing our orders, and this often resulted in much betterfills than would have been achieved with a market order. If the marketstabilized at a point which was past our stop price, then we would get outof the market, but we would do so without panicking.
Simultaneous Entry SignalsMany days as traders there was little market movement, and little for us todo besides monitor existing positions. We might go for days without placinga single order. Other days would be moderately busy, with signals occurringintermittently over the stretch of a few hours. In that case, we would simplytake the trades as they came, until they reached the position limits for thosemarkets.Then there were days when it seemed like everything was happeningat once, and we would go from no positions, to loaded, in a day or two.Often, this frantic pace was intensified by multiple signals in correlatedmarkets.This was especially true when the markets gapped open through theentry signals. You might have a gap opening entry signal in Crude Oil,Heating Oil and Unleaded Gas all on the same day. With futures contracts,it was also extremely common for many different months of the same marketto signal at the same time.
Buy Strength — Sell WeaknessIf the signals came all at once, we always bought the strongest markets andsold short the weakest markets in a group.We would also only enter one unit in a single market at the same time.For instance, instead of buying February, March and April Heating Oil atthe same time, we would pick the one contract month that was the strongest,and that had sufficient volume and liquidity.This is very important! Within a correlated group, the best long positionsare the strongest markets (which almost always outperform the weaker
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markets in the same group). Conversely, the biggest winning trades to theshort side come from the weakest markets within a correlated group.As Turtles, we used various measures to determine strength and weakness. The simplest and most common way was to simply look at the chartsand figure out which one “looked” stronger (or weaker) by visual examination.Some would determine how many N the price had advanced since thebreakout, and buy the market that had moved the most (in terms of N).Others would subtract the price 3 months ago from the current priceand then divide by the current N to normalize across markets. The strongestmarkets had the highest values; the weakest markets the lowest.Any of these approaches work well. The important thing is to have longpositions in the strongest markets and short positions in the weakest markets.
Rolling Over Expiring ContractsWhen futures contracts expire, there are two major factors that need to beconsidered before rolling over into a new contract.First, there are many instances when the near months trend well, butthe more distant contracts fail to display the same level of price movement.So don’t roll into a new contract unless its price action would have resultedin an existing position.Second, contracts should be rolled before the volume and open interestin the expiring contract decline too much. How much is too much dependson the unit size. As a general rule, the Turtles rolled existing positions intothe new contract month a few weeks before expiration, unless the (currentlyheld) near month was performing significantly better than farther out contract months.
FinallyThat concludes the Complete Turtle Trading System rules. As you are probably thinking, they are not very complicated.But knowing these rules is not enough to make you rich. You have tobe able to follow them.Remember what Richard Dennis said: “I always say that you couldpublish my trading rules in the newspaper and no one would follow them.The key is consistency and discipline. Almost anybody can make up a listof rules that are 80% as good as what we taught our people. What theycouldn’t do is give them the confidence to stick to those rules even whenthings are going bad.” — From Market Wizards, by Jack D. Schwager.Perhaps the best evidence that this is true is the performance of theTurtles themselves; many of them did not make money. This was not becausethe rules didn’t work; it was because they could not and did not follow therules. By virtue of this same fact, few who read this document will be
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successful trading the Turtle Trading Rules. Again; this is not because therules don’t work. It is because the reader simply won’t have the confidenceto follow them.The Turtle rules are very difficult to follow because they depend oncapturing relatively infrequent large trends. As a result, many months canpass between winning periods; at times even a year or two. During theseperiods it is easy to come up with reasons to doubt the system, and to stopfollowing the rules:What if the rules don’t work anymore? What if the markets have changed?What if there is something important missing from the rules?How can I be really sure that this works?One member of the first Turtles class, who was fired from the programbefore the end of the first year, suspected early on that information had beenintentionally withheld from the group, and eventually became convincedthat there were hidden secrets which Rich would not reveal. This particulartrader could not face up to the simple fact that his poor performance wasdue to his own doubts and insecurities, which resulted in his inability tofollow the rules.Another problem is the tendency to want to change the rules. Many ofthe Turtles, in an effort to reduce the risk of trading the system, changed therules in subtle ways which sometimes had the opposite of the desired effect.An example: Failing to enter positions as quickly as the rules specify (1unit every ½ N). While this may seem like a more conservative approach, thereality could be that, for the type of entry system the Turtles used, adding topositions slowly might increase the chance that a retracement would hit theexit stops — resulting in losses — whereas a faster approach might allow theposition to weather the retracement without the stops being hit. This subtlechange could have a major impact on the profitability of the system duringcertain market conditions.In order to build the level of confidence you will need to follow a tradingsystem’s rules, whether it is the Turtle System, something similar, or a completely different system, it is imperative that you personally conduct researchusing historical trading data. It is not enough to hear from others that asystem works; it is not enough to read the summary results from researchconducted by others. You must do it yourself.Get your hands dirty and get directly involved in the research. Dig intothe trades, look at the daily equity logs, get very familiar with the way thesystem trades, and with the extent and frequency of the losses.It is much easier to weather an 8-month losing period if you know thatthere have been many periods of equivalent length in the last 20 years. Itwill be much easier to add to positions quickly if you know that addingquickly is a key part of the profitability of the system.
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Chapter 8Further StudyWhere do you go from here? There is no substitute for experience.The humorist Barry Le Platner said: “Good judgment comes from experience,and experience comes from bad judgment.” If you want to become a trader,you must start to trade. There is no substitute. You must also make mistakes.Making mistakes is part of trading. If you don’t start trading using actualmoney — and enough money that it affects you when you win or lose —you won’t learn all the lessons of trading. Paper trading is not a substitutefor trading with real money. If you aren’t using real money, you won’t learnhow hope, fear, and greed affect you personally.At the same time, it is important to get a thorough understanding of thefundamentals of trading. Armed with this knowledge you will make fewermistakes, and you will learn much more quickly from the mistakes that youdo make.Here are some suggested areas for further study:
Trading PsychologyTrading psychology is the most important aspect of trading, and understanding yourself and your own personality as it relates to your trading is critical.This journey is much more about making a sincere and open-minded attemptto understand your own personal psychology than it is about finding themagic psychology book with all the answers.
Money ManagementMoney management is the most important aspect of a mechanical tradingsystem. Controlling risk in a manner that will allow you to continue tradingthrough the inevitable bad periods, and survive to realize the profit potentialof good systems, is absolutely fundamental. Yet, the interplay between entrysignals, exits and money management is often non-intuitive. Study andresearch into the state-of-the-art in money management will pay enormousdividends.
Trading ResearchThere is no substitute for statistically valid historical research when developing mechanical trading systems. In practice, this means learning how toprogram a computer to run simulations of trading system performance.There is a lot of good information on curve-fitting, over-optimization,trading statistics and testing methodologies on the web and in books, butthe information is a bit hard to find amongst the hype and bull. Be skeptical,but keep an open mind, and your research will pay off.
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Final WarningThere are a lot of individuals who try to sell themselves and their advice as“expert.” Don’t blindly accept the advice of these self-proclaimed experts.The best advice comes from those who aren’t selling it, and who make theirmoney trading. There are many books and biographies that give insightsinto the habits of those who have been — or who are — successful traders.Learning how to become a good trader — or even an excellent trader —is possible, but it requires a lot of hard work and a healthy dose of skepticism.For those of us who have chosen this path, the journey never ends. Thosewho continue to be successful will never reach their destination, but willlearn to find joy in the journey itself.
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List of Illustrations and Text DiagramsRegarding the illustrations in this book, except for those which are markedas adapted from other sources, the charts listed as Figures below have beenreproduced from the authors’ own “working” charts. As such, they weremade up originally for private use only and without a thought to theireventual reproduction, much less their publication. They are not and do notpretend to be works of art, but it is hoped that they will, despite their“homemade” appearance, serve the purpose of illustrating the various formations, patterns, market phenomena, and trading principles discussed inthe text. That they do not show the clean line and expert lettering of aprofessional draftsman’s work is regretted. The reader will, we trust, makeallowances.As for their selection, it should be stated most emphatically that it wasnot necessary to search through thousands of charts in order to find goodexamples of all these various technical formations. Many dozens, even hundreds, were available for practically every type of pattern. Anyone who haslearned to recognize them can find for himself plenty of good technicalpictures in a quick examination of even as small a portfolio as 50 or 100charts. In other words, the illustrations in this book are in no sense unique.In selecting them, we have tried only to show as much variety as possibleand samples from previous as well as more recent (EN: up to the year 2005)market history.Perhaps it is not necessary, but it is at least in accord with custom, toadd that the information as to specific market prices, volume of transactions,etc., used in preparing our illustrations (or cited in the text of this book) hasbeen derived from sources believed to be reliable, but is not guaranteed.EN: All graphics (except those after Figure 274) added by the editor for theeighth (and ninth) editions are identified by a “x.1” number; thus, DIAGRAM10.1 or FIGURE 10.1 is new and chosen by same.
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Part OneFigure
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UNITED STATES STEEL. Monthly price ranges fromJanuary 1929 to December 1946.Important swings of the DOW–JONES INDUSTRIAL ANDRAIL AVERAGES, 1941 through 1946.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, February 1to August 31, 1941.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, March 2 toOctober 31, 1942.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, November 2,1942, to June 30, 1943.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, July 1, 1943,to January 31, 1944.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, May 1 toNovember 30, 1945.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, December 1,1945, to May 31, 1946.The DOW–JONES INDUSTRIAL AND RAIL AVERAGES.Daily closing prices and total market volume, May 4 toOctober 19, 1946.The DOW–JONES INDUSTRIAL AVERAGE marked withDow Theory Signals 1The DOW–JONES INDUSTRIAL AVERAGE marked withDow Theory Signals 2HUMANA, INC. Daily, 1988. Head-and-Shoulders Top.CHICAGO, MILWAUKEE, ST. PAUL & PACIFIC. TheHead- and-Shoulders Top Formation which ended its BullMarket in February 1946.WESTINGHOUSE ELECTRIC. The Head-and-ShouldersTop of January through February 1946.TELEDYNE, INC. 1984. Large Head-and-Shoulders Top.IC INDUSTRIES. 1986. Head-and-Shoulders Top.DUPONT. Its Major Top in 1936, with an unusual Pullback.CONSOLIDATED EDISON COMPANY of New York. TheHead-and-Shoulders Reversal of 1937.REPUBLIC AVIATION. Its 1946 Bull Market Top. The Headand-Shoulders measuring formula.
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WALT DISNEY PRODUCTIONS. 1986.Head-and-Shoulders Top.NEW YORK CENTRAL. Head-and-Shoulders Top in Junethrough July 1945, followed by a MultipleHead-and-Shoulders Bottom.UNION CARBIDE & CARBON. The Head-and-Shoulderswithin a Head-and-Shoulders Top Formation which cappedits 1929 Bull Market.S&P 500. A Massive 10 year Head-and-Shoulders , ca 2005?LOCKHEED AIRCRAFT. A Head-and-Shoulders BottomReversal in December 1943.DOME MINES. Weekly chart showing the Major Head-andShoulders Bottom of 1942.FEDERAL NATIONAL MORTGAGE ASSOCIATION. 1984.Head-and-Shoulders Bottom.ILLUSTRATION OF KILROY BOTTOMDOW INDUSTRIALS. 2003 Kilroy (H&S) Bottom.MCA, INC. 1986. Complex Head-and-Shoulders Top.BUDD MANUFACTURING (now The Budd Company).Multiple Head-and-Shoulders Top of 1946.AMERICAN LOCOMOTIVE. Extended top of Multipletype, 1946.DIGITAL EQUIPMENT CORPORATION. 1985. From aHead- and-Shoulders Top to Complex Head-and-ShouldersBottom.ARCHER DANIELS MIDLAND COMPANY. 1984.Complex Head-and-Shoulders Bottom.GENERAL BRONZE. Multiple type Bottom formedJuly–September 1945.AMDAHL CORPORATION. 1984. Complex Head-andShoulders Bottom.PUBLIC SERVICE CORP. OF NJ. Weekly chart showingMultiple Bottom pattern of 1941 to 1942.NATIONAL SUPPLY. The “two-headed” Top Formation of1946.PHILLIPS PETROLEUM. The 1946 Top — a MultiplePattern merging into a Rounding Turn.AMERICAN & FOREIGN POWER 2ND PFD. A. A RoundingBottom formed in 1945.AMERICAN SAFETY RAZOR. Monthly chart. Two MajorBottoms — a Head-and-Shoulders in 1932 and “Bowl” in1942.THE BUDD COMPANY. Monthly chart showing MajorRounding Bottom of 1942.
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CERTAINTEED PRODUCTS. Monthly chart. MajorRounding Bottom of 1942.J.I. CASE. The Rounding Bottom of 1932 showing atemporary rally out of pattern.GAMEWELL COMPANY. A “dormant” type of RoundingBottom in 1944.INLAND STEEL. Semi-dormant Rounding Bottom of 1935.APPLIED MAGNETIC CORPORATION. 1988. Saucer-likePattern.CRAY RESEARCH. 1987. Gap and Rounding Top.NORTHERN INDIANA PUBLIC SERVICE. A magnificentScalloping tendency.HUDSON BAY MINING AND SMELTING. Major Bottomof 1941 to 1942, a perfect Symmetrical Triangle. Weeklychart.SEARS, ROEBUCK. Symmetrical Triangle Top of 1946, andsubsequent step-down pattern of same form.JOHNS–MANVILLE. Triangular Bottom development of1941 to 1942. Weekly chart.DELAWARE & HUDSON. Weekly chart. Wide-swingingSymmetrical Triangle Bottom of 1941 to 1942 withThrowback to apex Support.CUBAN-AMERICAN SUGAR. A Rounding Bottom in 1945which merged into a Symmetrical Triangle.NATIONAL GYPSUM. A false move out of the extremeapex of a Symmetrical Triangle.NORTH AMERICAN COMPANY. Symmetrical Triangletopping a recovery from a Panic Low in 1937.VERTIENTES — CAMAGUEY SUGAR of Cuba.Triangular- like development at 1946 Top.EASTERN AIRLINES. A Symmetrical Triangle in 1947 thatdid not carry through.NATIONAL GYPSUM. A typical Symmetrical Triangleleading to continuation of the preceding trend in 1944 to1945. Weekly chart.U.S. INDUSTRIAL CHEMICALS. Triangular Patterncompleting an extended reaccumulation period.AMERICAN BANKNOTE. The Major Bottom Reversal of1941 to 1942.CELANESE CORPORATION. Ascending Triangle ofconsolidation type in 1946.BRIGGS MANUFACTURING. Weekly chart of 1941 to 1943showing Triangular Bottom of ascending type.
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SEARS, ROEBUCK. The Symmetrical Descending TriangleTop of 1936 and subsequent Intermediate Recovery Bottomof ascending form.SOUTHERN RAILWAY PREFERRED. A perfect AscendingTriangle in 1936.ARMOUR & COMPANY. Long Ascending Triangle in 1946to 1947 in which distribution eventually overcame upwardtrend.SOCONY–VACUUM OIL. Ascending Triangle forminghead of Head-and-Shoulders Bottom in 1942. Weekly chart.BATH IRON WORKS. Descending Triangle Top of 1946,showing adjustment of pattern lines for Ex-Dividend Gap.REVERE COPPER & BRASS. Large Descending TriangleTop of 1946.WESTINGHOUSE ELECTRIC. The Descending Trianglewhich topped out “WX” ahead of the general market.HUDSON MOTOR CAR. Series of Triangles in the 1929–32Bear Market. Weekly chart.AMERICAN ROLLING MILL. The “hybrid” pattern ofascending type which formed in 1941 to 1943. Weekly chart.GOODRICH (B.F) COMPANY. The remarkably small butperfect Ascending Triangle which reversed its Major Trendin 1942. Weekly chart.EBAY. 2004 Descending Triangle Surprise.NASH–KELVINATOR. Rectangular distribution area of1945 to 1946.LIMA LOCOMOTIVE WORKS. Rectangular pattern of“conflict” in 1944 to 1945.LOEW’S, INC. Perfect Rectangle of the “pool operation”type, 1936.SOCONY–VACUUM OIL. Rectangle Top Formation of1946.YOUNGSTOWN SHEET & TUBE. Major Top of Rectangleformed in 1946.EASTERN AIRLINES. Long Consolidation ending inRectangle in early 1945.AMERICAN ZINC, LEAD & SMELTING. TheConsolidation Rectangle which followed aHead-and-Shoulders Top in 1946.SEARS, ROEBUCK. A “hybrid” Major Bottom Formationin 1941 to 1942.BELL AIRCRAFT. Ex-dividend drop causing apparent falsemove out of Rectangle in 1945.
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KENNECOTT COPPER. Series of ConsolidationFormations in 1937 Bear Trend.UNITED AIRCRAFT. The Double Bottom of 1942. Weeklychart.INCO COMPANY, LTD. Subsequent to the October crash,developed a large Head-and-Shoulders Top.REPUBLIC STEEL. Major Double Top of 1946 withsubsidiary patterns.AMERICAN AIRLINES. Weekly Chart. Bull Market Top of1945 to 1946, a form of Double Top.CONTAINER CORPORATION. The Major Double Bottomof 1941 to 1943. Weekly chart.TRINITY INDUSTRIES. 1985. Triple Bottom.PUBLICKER INDUSTRIES. Triple Top of 1946.NATIONAL GYPSUM. Triple Bottom of 1941 to 1942.Weekly chart.CRANE COMPANY. Broadening Formation of 1945 to 1946,a warning of final top.AIR REDUCTION. The classic Broadening Top of 1929.AMERICAN ROLLING MILLS. Small Broadening Top of1946 at the end of a generally broadening (and Bearish)Formation.CONSOLIDATED EDISON. Major Broadening Top onweekly chart of 1935 to 1938.INTERNATIONAL PAPER. Showing a form of“broadening” which is of doubtful technical significance.Weekly chart, 1945 to 1