Whether it is called “systematic trend-following”, “momentum trading” or “turtle trading”, it all comes down to entering trades on the basis of markets breaking out from previously established ranges and following some basic rules thereafter. It requires no special understanding of any given market – just a healthy respect for the price action – and can make you a lot of money in the process. Here are the details.
The following are edited excerpts from an article* by Tim Price, Director of Investment at PFP Wealth Management, entitled “Let’s just say Richie ran that $400 up pretty good…” as posted on SovereignMan.com.
[The following is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Price goes on to say in further edited excerpts:
In 1983, commodities trader Richard Dennis set out to show that a successful trading philosophy could be taught to anybody (he, himself, had borrowed $400 from his father and by the early 1980s had amassed a fortune of $200 million) provided they kept to the rules.[He] placed classified ads in the financial press soliciting trainee traders– no experience required. Successful applicants (called ‘turtles’ after Dennis’ experience of seeing a Singaporean turtle farm, and his belief that successful traders could be “grown” just like those turtles) were subsequently taught some basic rules about risk management and trend-following.
21 men and two women were hired over the next two years in two separate programmes. [The long and the short of it is that] many of ‘the turtles’ went on to become multi- millionaires…[and] some…went on to join the ranks of the most successful traders in history.
The basic ‘turtle’ rules involved:
- entering trades on the basis of markets breaking out from previously established ranges.
- If a given futures market traded at a new 20-day high, then it should be bought.
- If it traded at a new 20-day low, it should be sold.
- Stop losses were included for hedging downside risk.
- Risk per transaction was also carefully controlled.
The turtles were allowed to trade a variety of US futures markets, including interest rates, currencies, energies, metals and commodities (hard and soft). Futures markets were favoured due to their depth and liquidity.
Whereas most fund managers try and predict the future, the turtles simply paid attention to the market price.
- For as long as price trends persisted and they weren’t stopped out, they would add to their positions (subject to obeying the rules about appropriate position sizing).
- If the turtles lost money, they would have to reduce their bet size until they’d brought their account back into the black.
There are really only two ways of looking at financial markets:
- fundamental: to take into consideration macro-economic themes, the economy, interest rates, inflation and
- technical: what are prices doing?
Dennis recognised that price is the only metric really worth trusting– everything else is a matter of opinion. This trading strategy today goes by the name ‘systematic trend-following’. Unlike many approaches to trading, it requires no special understanding of any given market– just a healthy respect for the price action.
There are two specific reasons why we look favourably on systematic trend-following funds:
- they have a long history of generating attractive returns and
- whatever their future return streams, those returns can be confidently expected to come with roughly zero correlation to the stock market.
This makes them the perfect investment vehicle to sit within a properly diversified portfolio alongside the likes of stocks, high quality bonds, and real assets.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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