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Updated: May 25, 2021

The Complete TurtleTrader by Michael Covel. (Richard Dennis)



The Complete Turtle Trader, by Michael Covel.

The true story of how 23 novice investors became overnight millionaires.

Market wizard Richard Dennis the trend following pioneer, discloses his mid-1980’s turtle trading experiment where his group of novice traders strictly followed his rules, and over a 4-year period, made $150,000,000.

We take a glimpse at the story, the stats, and learn what we can from the trading system.

Richard Dennis started from humble beginnings in the early 1970’s, starting as a runner on a trading floor at the age of 17, and a few years later traded his own account.

He originally borrowed $1600 and spent $1200 on a seat at the MidAmerica Commodity Exchange, he soon turned the remaining $400 into $3000 in a short space of time, and between 1970 to 1973 he turned his equity into $100,000. A year later he returned a profit of $500,000 trading soybeans, and by 1975 he was a millionaire at the age of 26.

Dennis later formed a partnership with fellow trader William Eckhardt, a PHD mathematician who also successfully applied his knowledge to the stock market.

Both Dennis and Eckhardt fell into a philosophical disagreement. Dennis believed that his trading system could be taught to anyone providing there were a set of rules, whereas Eckhardt disagreed.

The argument became a catalyst towards the creation of the Turtle Trading program.

The name was inspired by a previous trip to Singapore to which Dennis said:-

“We are going to grow traders just like they grow turtles in Singapore”.

Soon after their firm C & D Commodities placed this advert into the Wall St Journal, Barron’s and the International Herald.

The point of ‘experience not being necessary’ is the key takeaway from the advert. We will learn shortly that the group were far from experienced traders.

In total there were more than 1000 applications to take part in the experiment. The experiment would provide 2 weeks training, and each would be provided with a 1-million-dollar account to trade with.

The successful applicants had varying backgrounds, including a Blackjack player, a computer game designer, a pianist, and an air force pilot.

This group went on to earn over 150 million dollars, which suggested that Dennis’s theory was right, you could teach anyone to trade provided they were given the appropriate training. Or put another way, trading is learnable and not an inborn talent.

In January 1984, during the two weeks of training, Dennis and Eckhardt focused on teaching the foundation of their trading style. The theory and concept of their style was hugely important, it was never about numbers moving up and down on a screen, there had to be a theory behind the method.

Dennis went on to say;

“You need the conceptual apparatus to be the first thing you start with and the last thing you look at.”

The turtles were taught to think of themselves as scientists first and traders second, the trading outcome was simply a result of the laws of reasoning.

This thinking put Dennis ahead of his time, and years later the academic Daniel Kahneman (author of Thinking Fast & Slow) won the Nobel Prize for ‘prospect theory’ also known as ‘behavioural finance’, which encapsulated Dennis’s prior teaching.

Fortunately, after a 10 year contractual secrecy pact ended in 1993, we have been able to gain access to the rules of the system, Let’s take a look.

Although we disclose the rules here, it’s important to point out that a successful system is more than just a set of rules.

Dennis Says;

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad”

With these rules, confidence, and discipline, embedded over just two weeks of training, the turtles earned an average annual compound rate of return of 80%.

The turtle trading system had no room for subjective decision making, it was considerably mechanical, promoted consistency, and eliminated any form of subjectivity.

We evaluate the turtle system against the following components.

The turtles traded commodities, or more popularly known today as futures, but the most important criteria when considering the future contract was the liquidity of the underlying market. Due to the amount of money placed into the market by the turtles, anything with a low trading volume would have made entering and exiting positions extremely difficult.

This leads us on to position sizing.

Turtle trader Curtis Faith said;

“Position sizing is one of the most important but least understood components of any trading system”

The turtles were taught a concept called ‘N’ to represent underlying volatility of a particular market, once N had been determined the position size could be calculated. Therefore, although the position size was a fixed percentage it was also volatility based.

The calculation of N is simply a 20-day moving average of the true range, commonly known today as the ATR or Average True Range.

The turtles used a position size calculation based on one N equalling 1%, therefore if N was determined to be two for a particular market then the position size would be 2% of account equity.

The turtles called their position sizes ‘Units’ and the formula is seen here.

The maximum amount of units that could be traded on a single market was 4.

The strategy also included the adjusting of account size, therefore if the markets were not moving as hoped the notional account size would be adjusted to suit.

For example, if the account size was originally $1,000,000 but the account lost $100,000 equalling a 10% loss, the turtles would base their next trading position on an account size of $800,000, or a 20% loss. So, for every 10% drawdown the turtles would trade based a theoretical 20% drawdown.

This would help protect capital should the markets continue to trend abnormally.

The next component of the turtles system is the entry, and contrary to belief the entry criteria for the turtle system is far from complex. It was based on the Channel Breakout systems taught by the notorious Richard Donchian. Commonly known as the Donchian’s channel breakout system.

There were two systems to choose from, a shorter-term system based on a 20-day breakout, or a longer-term system based on a 55-day breakout. Some traders chose one system whilst others chose a combination of both.

An interesting point to make is that the turtles did not wait for the close of the day to determine if the price remained above the breakout point, they would enter the trade as soon as the price broke the time frame being measured.

They would trade in either direction by buying the high or selling (or going short) the low.

The turtles were told to pyramid the trades thereafter, for example, for every half a percent change in price after breakout, the traders would add another half a percent of their account to the position, up to a maximum 2%.

The turtles were told to be very consistent with the entry rules, knowing that most of the returns come from a minority of trades. So if one trade was missed it could have a huge impact on profits.

An expression commonly used is;

“There are old traders and there are bold traders, but there are no old bold traders. Traders that don’t have stops go broke”.

The turtles had a pre-defined risk on every trade, this was non-negotiable.

The maximum exposure to any position was 2% of total equity (Or 2 ‘N’ when accounting for volatility), additionally any pyramided positions would also have the stops raised, therefore ensuring maximum exposure always remained at 2%.

Due to the size of funds traded however, the turtles did not enter the stop loss position with the broker, they did not want to reveal the positions to the market. Instead the stop loss figure, although predefined, was not entered until price reached the price set.

Since the stops were based on ‘N’ (i.e. adjusted for volatility), volatile markets had wider stops and less risk per contract. This reduced risk across all positions and gave improved risk management.

Another old saying suggests; -

“you can never go broke taking a profit”

But knowing that the turtles were trend followers, this would have often meant taking profits too early, which is one of the most common mistakes when using trend following systems.

Take this trend as an example, many traders would have perhaps taken their profits here after a spike in price, or possibly here after a pullback. The temptation for either exit is often too great.

Of course, every trading system is different, and exiting at these points could make sense for the concept of your system, but for the turtles trend following system, this would have led to poor performance.

So how did they exit a profitable position?....

Again, the exiting rules were not complex, but allowed for the capturing of a full trend.

System one exit was simply a 10 day low, therefore if a 10 day low was experienced at any point in the trend, the position would be exited.

Likewise, system two had a 20 day low exit.

In terms of complexity they were simple rules, but in terms the psychology and discipline, following such rules is very difficult. At times, these 10 and 20-day rules would see large profits evaporate in a comparatively short space of time. Especially if the chart looked more like this.

Dennis said;

“A good trend following system will keep you in the market until there is evidence that the trend has changed”.

These exits rules provided the evidence, and the turtles would exit without hesitation.

Before we move on to some of the results produced, this comment from Dennis summarises his thoughts.

“Trading was more teachable than I ever imagined. Even though I was the only one who thought it was teachable…. It was teachable beyond my wildest dreams”.

In 1989 The Wall Street Journal produced an article showing the results of 14 turtle traders taught by Dennis and Eckhardt.

Here we have the range of annual results for each trader, and here, the average annual returns for the 4 years of trading. Notice how Stig Ostgaard achieved a staggering range of between 87% and 296% per year.

The average return for all turtle traders equated to 80%, whereas the Barclays CTA index, which reports the results of 110 advisors holding more than 4 years’ experience, achieved an average of 25%.

The S&P 500 returned 19.2% in comparison.

Each of the turtles would keep 15% of the profits, whereas Dennis and Eckhardt would keep 85%.

Clearly the teachings from Dennis and Eckhardt provided huge performance benefits, with each of the turtles achieving considerably more than popular benchmarks.

In summary, it was proven that in such a short period of time someone with no prior experience could be turned into a professional trader.

The turtles understood the concept of a simple trend following system, and by applying good risk management, sticking to the rules with unquestionable consistency and discipline, outstanding results could be achieved.

A great story for inspiration, achieving 5 stars.

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