Faith, C.М. Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders

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After the trade was over, my account was up $78,000. I was

rewarded for holding to the methods we were taught by earning

almost three times as much on this trade as any of the other Turtles

did. The few who had positions of a reasonable size had all exited

near the lows of the previous dip and ended up missing half the

move. The Turtles who had not entered the trade made nothing.

The difference in return had nothing to do with knowledge and

everything to do with emotional and psychological factors. It seemed

crazy to me. We all had been taught exactly the same thing, but my

return for January was three times that of the others in the class or

more. These were very intelligent people who had been taught by

the most famous trader of that time. Several of them would be among

the most successful traders in the world within a few years, yet they

had failed to execute the plan during the practice trading period.

Over the years I kept ﬁnding evidence that emotional and psy-

chological strength are the most important ingredients in successful

trading. This was my ﬁrst exposure to that idea and the ﬁrst time I

had seen it in action.

The First Report Card

During the ﬁrst month of trading, Rich and Bill dropped by once

a week or every other week. After the ﬁrst month was over, they

came by and conducted an extensive Q&A session with the group.

In it, Rich asked all the Turtles why they had not bought more heat-

ing oil. Some answered that they had thought the trade was too

risky, that it had gone up too fast; others had thought the move

would not last because there were only a few days left for trading

the contract.

44 • Way of the Turtle

I had looked at things differently. At the time, I based my strat-

egy on the belief that Rich would be evaluating us on our ability

to execute the systems we were taught. I also thought he would look

more favorably on trades faithfully executed that incurred losses

than on trades we should have taken but did not, even if that

avoided losses.

I thought the riskiest thing to do was not take the heating oil

trade. During the Q&A, Rich made it clear to everyone that taking

the trade was the correct move. The scenario could not have been

better for teaching the class a valuable lesson. Slightly more than

one month after training, we had witnessed in actual trading the

importance of not missing trends and had that lesson reinforced in

such a way that none of us would ever forget it.

Rich had told us that after the ﬁrst month that he would give

those of us who did well a $1 million account to trade. He had indi-

cated before we actually traded that many in the class would not

get the full account and that we would get the opportunity to trade

larger only when we proved ourselves. Several in the class did

receive the $1 million account Rich promised because he had faith

in their ability to execute. Many others continued to trade the lim-

ited accounts we used in January for several more months.

I was surprised but pleased when Rich gave me a $2 million

account to trade. Evidently he liked the way I had handled the

heating oil move.

The First $2 Million Is the Toughest • 45

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•47•

four

THINK LIKE A TURTLE

Good trading is not about being right, it is about trading right.

If you want to be successful, you need to think of the long run

and ignore the outcomes of individual trades.

fter witnessing the success of the Turtles, many traders and

investors have concluded that Richard Dennis won his bet

with Bill Eckhardt that trading can be taught. I don’t agree. I think

the bet was a draw.

What people do not know is that many Turtles, perhaps one-third

to one-half of them, were less proﬁtable than the highest-performing

Turtles or were not successful at all. So, although most of the Tur-

tles learned from the experiences of that ﬁrst month and over the

months that followed developed into winning traders, others were

dropped from the program with losing records. The difference

between the best- and the worst-performing Turtles came down to

their individual psychological makeup. Some took more readily to

the Turtle Way than did others, proving that although trading can be

taught to most people, some are better suited to it than others.

An important aspect of understanding the winning trader is

understanding how his or her emotions affect trading. If you were

born with the right qualities, you will ﬁnd it easier to learn how to

trade well; if you were not, you will need to develop those quali-

ties. That will be your primary task. What are the right qualities?

It’s Not about Who’s Right

Winning traders think in the present and avoid thinking too much

about the future. Beginners want to predict the future in their trad-

ing. When they win, they think it means they were right and they

feel like heroes. When they lose, they feel like scum. That is the

wrong approach.

Turtles do not care about being right. They care about making

money. Turtles do not pretend to be able to predict the future. They

never look at markets and say: “Gold is going up.” They look at the

future as unknowable in speciﬁcs but foreseeable in character. In

other words, it is impossible to know whether a market is going to

go up or down or whether a trend will stop now or in two months.

You do know that there will be trends and that the character of

price movement will not change because human emotion and cog-

nition will not change.

It turns out that it is much easier to make money when you are

wrong most of the time. If your trades are losers most of the time,

that shows that you are not trying to predict the future. For this rea-

son, you no longer care about the outcome of any particular trade

since you expect that trade to lose money. When you expect a trade

to lose money, you also realize that the outcome of a particular

trade does not indicate anything about your intelligence. Simply

put, to win you need to free yourself and your thinking of outcome

bias. It does not matter what happens with any particular trade. If

48 • Way of the Turtle

you have 10 losing trades in a row and you are sticking to your plan,

you are trading well; you are just having a bit of bad luck.

Forget the Past

Ironically, as well as thinking too much about the future, most

traders dwell too much on the past. They worry about what they

have done, the mistakes they have made, the trades in which they

have lost money.

Turtles learn from the past but don’t worry about it. They don’t

berate themselves for mistakes they have made. They also don’t crit-

icize themselves for trades in which they lost money; they know

that is part of the game.

Turtles view the past holistically and don’t put any particular

emphasis on recent events. The recent past is no more important

than any other historical time period; it only feels that way. Turtles

avoid recency bias. They know that most of the traders in the mar-

ket exhibit this tendency, and for that reason, the market often

shows evidence of the same bias. The ability to avoid recency bias

is an important component of successful trading.

I saw the crippling effect of recency bias ﬁrsthand long after the

Turtle program had ended. Once the program had been com-

pleted, each Turtle had to wait six years before the conﬁdentiality

agreements expired and we could tell others about the methods we

used to trade. I had a couple of close friends who were interested

in learning those methods because they knew how well the system

worked for me.

In 1998 I taught one of them my methods after warning him

that consistency was the key. I told him that he had to execute all

Think Like a Turtle • 49

the trades religiously or he would not be successful. So what did

he do? He became a victim of recency bias.

Around February 1999 I asked him how he was doing in cocoa

since I had noticed that there was a great downward trend. He told

me that he did not take the trade because he had lost so much trad-

ing cocoa and thought that the trade was too risky. Table 4-1 shows

the cocoa trades one would have encountered by trading breakouts

from April 1998 until the trade with the large trend occurred. Note

that there are 17 losing trades in a row in the cocoa market before

a very sizable winning trade that started in November 1998.

This is typical of what you should expect to encounter in trading.

If you consider a single market at a particular point in time, things

can look very bleak. You may go several years before ﬁnding a single

good trend in some markets. If you focus too much on the recent past,

you will be tempted to think that certain markets are not tradable.

My friend was not unique. Most traders are plagued by the

recent past. Some of the Turtles were affected by it so strongly dur-

ing the program that they never traded successfully and ﬁnally were

cut. Ironically, it seems that just about the time everyone else gives

up, trends appear and tend to be easy to ride and extremely prof-

itable. We’ll examine this phenomenon in more detail later in

Chapter 13 in our discussion of portfolio and market analysis.

Avoid the Future Tense

Earlier in the book we established how cognitive biases can torture

potentially good traders. Recency bias, the strong need to feel that

one is right, and the propensity to predict the future are to be

avoided at all costs.

50 • Way of the Turtle

Table 4-1 1998 Cocoa Breakout Trades

Number Unit Entry Position Price Quantity Exit % Proﬁt Total

1 1 27 Apr L 2,249 6 2,234 (2.4) $ (1,197)

2 1 6 May L L 2,261 6 2,246 (2.1) $ (1,026)

3 1 12 May L L 2,276 6 2,261 (2.2) $ (1,036)

4 1 14 May L L 2,283 6 2,268 (2.4) $ (1,133)

5 1 23 Jun S 2,100 6 2,114 (2.3) $ (1,061)

6 1 25 Jun S 2,094 6 2,108 (2.4) $ (1,053)

7 1 29 Jun S 2,085 6 2,099 (3.0) $ (1,317)

8 1 15 Jul S 2,070 6 2,084 (2.5) $ (1,066)

9 1 27 Jul S 2,069 5 2,083 (1.9) $ (777)

10 1 3 Aug S 2,050 5 2,064 (2.7) $ (1,104)

11 1 13 Aug S 2,036 6 2,049 (2.2) $ (848)

12 1 17 Aug S 2,024 6 2,036 (3.0) $ (1,155)

13 1 24 Aug S 2,024 6 2,035 (2.4) $ (874)

14 1 16-Sep S 2,014 5 2,026 (2.1) $ (756)

15 1 1 Oct S 1,979 5 1,992 (2.4) $ (845)

16 1 13 Oct S 1,976 5 1,988 (2.2) $ (779)

17 1 28 Oct S 1,967 5 1,979 (2.1) $ (722) $(16,750)

18 1 6 Nov S 1,961 5 1,438 75.0 $ 24,940

19 2 20 Nov S 1,918 6 1,928 (2.4) $ (799)

20 2 24 Nov S 1,903 6 1,914 (3.0) $ (975)

21 2 30 Nov S 1,892 5 1,903 (2.7) $ (834)

22 2 8 Dec S 1,873 5 1,438 67.2 $ 20,575

23 3 21 Dec S 1,824 5 1,836 (3.5) $ (1,075)

24 3 4 Jan S 1,808 5 1,820 (2.4) $ (709)

25 3 15 Jan S 1,798 4 1,438 46.7 $ 13,468

26 4 25 Jan S 1,748 4 1,760 (2.1) $ (608)

27 4 27 Jan S 1,742 4 1,754 (2.1) $ (605)

28 4 8 Feb S 1,738 7 1,438 42.8 $ 19,275 $55,903

• 51 •

To overcome the third afﬂiction, you need to think about the

future in terms of possibilities and probabilities rather than in terms

of prediction. When my circle of friends learned of my success as a

Turtle, they kept asking what direction I thought a particular market

would take. Everyone assumed that because I was part of a renowned

trading group and had made millions trading futures, it must have

been because I knew something deﬁnitive about the future. My stan-

dard response surely surprised them: “I have no idea.” The truth was

that I really didn’t. Sure, I could have guessed, but I had absolutely

no faith in my ability to predict markets. In fact, I purposely did not

attempt to predict the future direction of markets.

Unfortunately, unless you happen to be an actuary working for

an insurance company, you generally do not think in terms of prob-

abilities. People tend to think in terms of likely or unlikely but

never in terms of probabilities. That is why insurance companies

insure against uncertain risks. An event such as a hurricane destroy-

ing your house is one such risk. There is a certain probability that

there will be a hurricane that affects your house if you live near the

tropical ocean. There is a slightly lower probability that the hurri-

cane will be strong enough to damage your home. There is an even

lower probability that it will be powerful enough to destroy your

home completely.

If you knew that your house would be destroyed by a hurricane with

100 percent certainty, you would not buy insurance; you would move.

Fortunately, the risk of that happening is less than 100 percent, so

much less in fact that you decide to stay and insure your house.

An insurance company that insures against hurricanes will have

a fairly good idea of the level of damage that is likely to occur at

your particular location when it prices a policy covering such an

52 • Way of the Turtle

event. This is how insurance companies make money: They sell

policies to cover risks for less than the probable cost of payout under

those policies.

Trading is much the same as insuring against uncertain risks.

Trading is ﬁlled with uncertainties. You do not know whether a

trade is going to make money. The best you can do is be conﬁdent

that the rewards will outweigh the risks over the long run.

Thinking in Probabilities

Many of you took probability and statistics courses in high school

or college. No doubt you would have seen a graph like the one

shown in Figure 4-1.

Figure 4-1 shows what is known as a normal distribution. This

particular graph depicts the distribution of women’s height. The

Think Like a Turtle • 53

Normal (Gaussian) Distribution

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

72706866646260585654 73716967656361595755

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Cumulative Probability

Probability Density

Figure 4-1 A Normal Distribution of Women’s Height