Author: Michael W. Covel
Richard Dennis
🚶Bruce Kovner, Louis Bacon, Pual Tudor Jones
🎥 Trading Places
📖 Hylas and Philonous
🚶Richard Donchian(undisputed father of trend following)
📖Colleges that Change Lives
📖Selling the Invisible

In Dennis’ book, everything about the markets was teachable, starting with his very first prerequisite: a proper view of money. He didn’t think about money as merely a means to go buy stuff at the mall, the way most people do. He thought of money as a way to keep score. He could just as easily have used pebbles to keep count. His emotional attachment to dollars and cents appeared nonexistent.
He thought in terms of leverage.

Great training alone was not enough to win for the long run. In the end, a persistent drive for winning combined with a healthy dose of courage would be mandatory for Dennis’ students’ long-term survival.

His moneymaking style was about mammoth home runs and many smaller strikeouts. If there was a “secret” he knew that you had to be able to accept losses both psychologically and physiologically.

💭”How much of a role does luck play in trading? In the long run, zero. Absolutely zero. I don’t think anybody winds up making money in this business because they started out lucky.” — Richard Dennis

To succeed in trading you need the ability to suspend your belief in reality.

The answer to the question of whether trading can be taught has to be an unqualified yes.

Eckhardt had not seen much correlation between good trading and intelligence: “Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important. This is not rocket science. However, it’s much easier to learn what you should do in trading than to do it.”
As with anything in life, most people know what the right thing to do is but fail to do it. Trading is no different.

Dennis and Eckhardt taught the Turtles not to consider their trading in terms of amounts of money. They wanted them to think of money as a variable, because in that way, regardless of account size, they could make the correct trading decisions at all times.

💭”When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” — Sherlock Holmes

Trend followers always wait for a market to move; then they follow it.

The Turtles’ core axioms were the same ones practiced by the great speculators from 100 years earlier:

The Turtles had to be able to answer these questions at all times:

The Turtles were taught to treat that additional $100,000 as they did their original $100,000. They had to use the same concern, care, and discipline.

💭”How much money you used to have has no significance. It’s how much money you have now.” — Eckhardt

The Turtles were taught not to fixate on what particular market made money that month or year or what market lost money. They learned to be agnostic and accept whatever trending market created opportunities.

💭”The average batter hits maybe .280 and the average system might be successful 35% of the time.” — Dennis

Expectation (or edge, or expected value) is calculated with a straightforward formula:
E = (PW X AW) – (PL X AL)
Where:
E = Expectation or Edge
PW = Winning Percent
AW = Average Winner
PL = Losing Percent
AL = Average Loser
For example, assume a trading system has 50 percent winning trades. Now, assume the average winning trade is $500 and the average losing trade is $350. What is the “edge” for that trading system?
Edge = (PW X AW) – (PL X AL) Edge = (.50 X 500) – (.50 X 350) Edge = 250 – 175 Edge = $75 on average per gain per trade.

☕Percent accuracy means nothing.
Think about Las Vegas. A small edge keeps casinos in business. That’s how those monster hotels in Las Vegas and Macau are paid for; by exploiting the edges. Dennis always wanted his trading to resemble being the house.

Trading your own account tip #1
You need to calculate your edge for every trading decision you make, because you can’t make bets if you don’t know your edge. It’s not about the frequency of how correct you are it’s about the magnitude of how correct you are.

♟️The Turtles were taught to enter trades via “breakouts”. A breakout occurs when a market “breakouts through” a recent high or low. If a stock or futures contract made a 55 day breakout to the upside, meaning that its price was the highest price of the last 55 days, Turtles would buy.

Trading your own account tip #2
Now that the concept of using price for your decision-making is clear, stop watching TV! Stop looking at financial news. Start keeping track of the open, high, low, and close of each market you are tracking. That is the key data you need to make all of your trading decisions.

Trading your own account tip #3
You need to be able to wrap your arms around the concept of “shorting” a market. Or said another way, you have to relish the opportunity to make money in a decreasing market. Shorting was never unique to the Turtles; they just did it effectively.

The Turtles learned two breakout variants or “systems.”
System One (S1) used a♟️four-week price breakout for entry and a two-week price breakout in the opposite direction of the entry breakout for an exit. If a market made a new four-week high, the Turtles would buy. They would exit if/when it made a two-week low. A two-week low was a ten-day breakout—counting trading days only.
While the System One entry rule is straightforward, the Turtles were taught extra rules to confirm whether or not they should take the four-week breakout. The extra rules were called “filters,” and they were designed to increase the odds that when the Turtles took a four-week breakout signal, it would continue as a potentially big trend.
The filter rule: The Turtles ignored the System One four-week breakout signal if the last four-week breakout signal was a winner. Even if they did not take the last four-week breakout signal, or even if it was just “theoretically” a winning trade, the Turtles still didn’t take the System One breakout. However, if the trade before a current four-week breakout was a 2N loss, they could take the breakout(“N” was simply their measure of volatility.)

If the Turtles skipped a System One four-week breakout and the market kept trending, they could and would get back in at the System Two eleven-week breakout (see below).
This fail-safe System Two breakout was how the Turtles kept from missing big trends that were filtered out.
System Two was the Turtles’ longer-term trading system. It used an♟️eleven-week breakout (fifty-five days) for an entry signal and a four-week breakout (twenty days) in the opposite direction for an exit.

Trading Your Own Account Tip #4
The price “breakout” was Turtle jargon to describe a market that had just made a new high or new low over “x” period. Do traders use other values beyond twenty and fifty-five days for entry? Yes. The selection of these values for your trading will always be subjective. Test or practice these rules on paper and/or trading software so you can see the ups and downs and gain confidence. The Turtles typically put half of their money toward each system.

Trading Your Own Account Tip #5
Feel free to experiment on breakout lengths. Do not fixate on specific values. The key will be to accept a breakout value and stick with it consistently. Testing and practice are wise for confidence. Trust, but verify.

It is important to note that Turtles always exited after the market went against them, thus having to endure the painful experience of giving back profits. You can’t pick the bottom and you can’t pick the top, so trying to end up with the “middle” of the trend was the goal.

Following the rules means there will be losses.

Trading Your Own Account Tip #6
Stop worrying only about how you enter a trade. The key is to know at all times when you will exit.

Turtle risk management starts with measurement of daily market volatility. The Turtles were taught to measure volatility in terms of “daily ranges”. It was nicknamed “N”(also known as the Average True Range ,ATR). They were taught to take the maximum of the following for any market to derive “N”:

Trading Your Own Account Tip #7
You can determine the average true range for any stock or futures contract. Simply take the last fifteen true ranges, add them up, and divide by 15. Repeat each day, dropping off the oldest true range. Many software packages will do this automatically.

Eckhardt explained the logic behind “N”: “We found that volatility is something that can be described as a moving average process. Our incorporation of a volatility element in our trading—something that tells us how large our positions should be—has both kept us out of trouble during the tough times and allowed us to capture large gains when things are going our way.”

If the “N” for corn was 7 cents and the market was up 5.25 cents, then the market was up three quarters of an “N”.

We learned the correct way to think was “How much did the market move today?”

Once they had a feel for “N”, the Turtles were instructed about how much to bet. They bet a fixed 2% of their capital on hand on each trade. If they had $10,000, they would bet 2%($200) on each trade.

Trading your own account tip #8
Take your account(whatever size it is) and multiply by 2 percent. For example, a $10,000 account would risk 2%, or $200 per trade. It is always better to bet a small amount initially on any trade in case you are wrong; which can easily be greater than 50% of the time. While the Turtles typically used a 2% bet, you can reduce your risk and reduce your return by decreasing that number too, for example, 1.5%, etc.

♟️The Turtles used a 2N stop.

Trading your own account tip #9
Assume you are trading Google stock and its ATR is 20. A 2ATR(2N) stop would be 40. If you lose 40 points on Google, you must exit, no questions asked.

A low “N” value always means more contracts.

Jerry Parker found that his best trends often start with very low volatility at the initial breakout entries.

Parker’s analysis kept showing that a low “N” measurement at the time of entry was a good thing.

Assume a trading account of $25,000, risking 2% on each traded and seeking a trade mini corn futures using a 3N stop. Mini corn has a single “N” dollar value of $70. $25,000 x 2% = $500 with a 3N stop = $210. The number of contracts to trade on this unit is 2.38 rounded down to 2 contracts.

Pyramiding: Adding to winners
Once the Turtles understood S1 and S2 entry and exit rules, once they understood N and units, Eckhardt then instructed the Turtles to pile profits back into winning trades.

Assume that you will add another unit each 1N move. A new unit will be added at 105, 110, etc. Turtles could pyramid a maximum of 5 unites. They set their stops at V2N on the first day of trading and from that point forward, 2N stops were used. Then, once the second unit was bought, both stops were brought up to the new unit’s 2N stop. As new units were added, all stop were brought up to the stop of the newest unit added.

Trading your own account tip #10
If you want to make Turtle-like money, you will need to use leverage. The key is to always manage your leverage use and not let it get past your limits.

♟️For every 10% in drawdown in their account, Turtles cut their trading unit risk by 20%.

Liquidation(Exit) rule summaries
There were two basic “stops” or exits to get Turtles out of their trades:

Trading your own account tip #11
There is no one set portfolio you can trade. Today, traders trade Turtle-like rules across widely differing portfolios(stocks, currencies, bonds, commodities, etc) It is a primary reason traders have differing performances. There is also no one starting capital number that can be promised as an elixir for all traders. Some start with small money and get huge. Some start with big money and don’t make it.

💭”No matter how good you get you can always get better and that’s the exciting part.” — Tiger Woods

💭”It’s important to live with someone who says ‘It’s okay to lose money.'” — Jerry Parker

Pinpointed traits of entrepreneurs:

💭”The Ivies and other A-league schools have a lot of prestige because they’re supposed to open doors and lead to successful careers. But parents who expect the Ivies to ensure their kids’ success are going to be disappointed. The old-boy network isn’t much good in an economy like this. It’s competence that counts.” — Loren Pope

💭”You have to have faith in two things. God and your system.” — Jerry Parker

Those 100 year floods that give mean reversion traders solace really occur every 2~3 years and they can and do wipe out fortunes.

💭”Good traders apply every ounce of intelligence they have into the creation of their systems, but then they’re dumbbells in following them. You’ve go tot have a schizoid approach. Work like hell to make it good, and then ignore it like you’re a brick wall. President Bush would be a great trader if he had a system.” — Dennis

There are many ways to analyze successful entrepreneurial traders, but “winning” is the starting point. Behind all the talk about teamwork and balance, people still judge trading success by an individual’s ability to win big money. True competitors have a remarkable immunity to failure. It’s simply not a factor that takes them out of the game even when it happens. They have a single-mindedness and zealous disregard for obstacles. They have indefatigable optimism. Winners pursue the prize because they are sure they can get it. They’re less afraid of striking out than of not taking every possible turn at bat that comes their way.

💭”If you want to be successful at something you want to identify who’s been successful and what they are doing.” — Salem Abraham

💭”In my whole life, I have known no wise people over a broad subject matter area who didn’t read all the time; none, zero.” — Charlie Munger

Consider the similarities between the skills of a surgeon and those of a trader. Great surgeons are the ones who are conscientious, industrious, and boneheaded enough to keep practicing day and night for years on end.