Can trading be taught? The famous “turtle experiment” says it can. And the turtles followed trends.
Editor’s note: This is part two of a three-part series on Richard Dennis and his “turtle traders,” and what traders can learn from the 1980s experiment. Part 1 tells the turtle traders’ story and offers a few tips on how to trade like a turtle.
We’ve all heard the saying “the trend is your friend,” and for good reason. There’s an entire group of traders and money managers who swear by the so-called “trend-following” approach.
Well, there’s no trading holy grail, but trend-following can be an effective way to invest, says David Settle, curriculum development manager for Investools® from TD Ameritrade Holding Corp.
To understand the nature of trend-following, it may help to think back to Sir Isaac Newton—the man with the apple—and the first of his laws of motion. In case you slept through high school physics class, the law simply states that an object in motion tends to stay in motion until it encounters a greater opposing force.
This concept can be applied to market trends, too. Trading in the direction of the primary trend can offer the path of least resistance for traders … until the end of the trend. Technical traders use a variety of indicators, such as moving averages and trendlines, to trade with the trend.
One basic approach that the turtle traders used was a new four-week high as an entry signal. The exit signal was a close below the 20-day low. The idea was to buy upside breakouts from a trading range to catch a new trend move, and get out on a signal that the trend was exhausted.
“Systems work as long as traders and investors stay disciplined. This particular system shoots for bigger winners, as trends can last for some time,” Settle says.
The Investools Method® is similar to the turtles' approach in that it’s also based on trends and momentum. It relies on the idea that strength begets strength. Settle explains:
The key to the turtles’ success wasn’t necessarily the technical analysis; the entry and exit rules were relatively basic compared to some price rules, Settle notes. He points to the importance of monitoring risk. “The risk management rules and scaling rules—entering and exiting multiple smaller positions instead of all at once on the first signal—allowed turtle trades to maximize the trend and keep losses small when original positions didn’t work out,” Settle says.
The key takeaway for traders? No matter what your trading style, managing risk is the most important part of any investing plan. "Allow winners to keep going as long as possible and cut off trades that don't work out quickly to minimize the loss. Small losses are okay, but big losses can be catastrophic," Settle says.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Investools Inc. and TD Ameritrade, Inc., are separate but affiliated companies that are not responsible for each other’s services or policies. Investools® does not provide financial advice and is not in the business of transacting trades.
*Investools 7-day free trial is valid for new Investools clients only. Offer is available through December 31, 2017. New Investools clients are able to select a free 7-day trial for either the Stock Investing course or the Income Investing course. Investools reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where Investools is not authorized to do business. A valid email address is required to participate.
Please allow 1 week from requesting the free trial to receive an email from Investools with information on how to access your 7-day free trial. The 7-day trial includes access to either the Stock Investing or Income Investing online course, online and in-person workshops, one-to-one coaching, online coaching, Investor Toolbox®, and Trading Rooms®. After the 7-day trial ends, you must subscribe to maintain access. Cost for the Stock Investing course for non-TD Ameritrade clients will be $699. Cost for the Stock Investing course for TD Ameritrade clients will be $499. Cost for the Income Investing course for non-TD Ameritrade clients will be $2,199. Cost for the Income Investing course for TD Ameritrade clients will be $1,549.Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.