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The Original Turtle Trading Program

Atlantic Pacific Trading Group

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Richard J. Dennis of C&D Commodities is accepting applications for the position of Commodity Futures Trader to expand his established group of traders. Mr. Dennis and his associates will train a small group of applicants in his proprietary concepts. Successful candidates will then trade solely for Mr. Dennis: they will not be allowed to trade futures for themselves or others. Traders will be paid a percentage of their trading profits, and will be allowed a small draw. Prior experience in trading will be considered, but is not necessary. Applicants should send a brief resume with one sentence giving their reason for applying to: C&D Commodities 141 W Jackson, Suite 2313 Chicago IL 60604 Attn: Dale Dellutri Applications must be received by October 1, 1984. No telephone calls will be accepted.

y An initial group of 13 people were selected and trained y Dennis funded each trader with $500,000 to $2,000,000

accounts y Result: Over the next four years, the Turtles averaged an 80% annual return y What were the Turtles taught?

What the Turtles Knew

y 10 year non disclosure agreement expired 1993 y One Turtle began selling the rules in the mid 90s y Other Turtles thought selling the rules dishonorable y So they published the rules online for free y Richard Dennis was fine with that, believing that few traders

would have the discipline to follow the rules anyway and the markets would change

Time out
y What were the rules? 1. Channel breakout 2. Trend

following 3. Trailing stops

y Why did they work? 1. Objective 2. Limited losses/let

profits run 3. No prediction

y When do they not work?

Flat markets

General Features of the Turtle System

y Comprehensive set of rules 5 major decisions y Disciplined rules eliminate emotional or subjective

y Does not predict price
y Instead, reacts to the market direction trend

following system y Adds positions to winners, gets out of losers y Objective: limits losses, lets profits run

Decision 1: Markets traded

y Liquidity is the main criterion no aluminum, no broiler y y y

chickens Traders were given a menu of liquid contracts from which to choose Some discretion: instructed to diversify Did not trade grains due to Dennis personal position limits or meats due to the perception that they were less than honest pits at that time Traded interest rates, stock indices, softs, currencies metals and energies

Decision 2: Position Sizing

y Number of positions are limited to manage potential

exposure y Risk units are based on recent volatility Average True Range y Recent volatility is translated into equal dollar units based on contract size: N y N unit represents the same risk across commodities: 1%

Position Sizing /Correlated Markets

Level Type 1 Single Market 2 Loosely Correlated Market 3 Single Direction - Long or Short
Single Market / Single direction Closely Correlated Markets - heating oil and crude oil; gold and silver Loosely Correlated Markets - gold and copper; silver and copper

Maximum Units 4 Units 10 Units 12 Units

Position Sizing /Adjustment to Drawdown

y Size Adjustment 10% drawdown results in 20% reduction

in notional account size Example

Trading $1,000,000 notional, account draws down (10%, $100,000) leaving $900,000 New notional account size: $800,000 until balance returns to yearly starting equity

Decision 3: Entries
Based on Donchian channel breakouts System 1 - A short term system based on a 20-day breakout. System 2 - A simpler long-term system based on a 55- days breakout. System 1 Entry Price > average 20-day high = buy one unit (long position) Price < average 20-day low = sell one unit (short position) System 2 Entry Price > average 55-day high = buy one unit (long position) Price < average 55-day low = sell one unit (short position)

Decision 4: Stops
N = 1% of account equity , maximum stop: 2N, 2% of account equity Crude Oil example N = 1.20 55 days breakout/buy entry point = 28.30 Initial stop = 2N or 2.40 points Entry Price 28.30 Initial Stop 25.90

First Unit

Stops / Additional positions

N = 1.20 55 days breakout = 28.30 New position Entry Price First Unit 28.30 Second Unit 28.90 Third Unit 29.50 Fourth Unit 30.10 Stop 27.10 27.70 28.30 28.90

Decision 5: Exits
System 1 exit = 10 days low/high for long positions System 2 exit = 20 days low/high for long positions

Waiting for a 10 or 20 days new low can often mean watching 20%, 40% even 100% of significant profits evaporate

What to Expect
y 65 75% losing trades y Extended periods of inactivity y Negative start and periods of negative returns y Small losses, larger wins y Losses managed with trailing stops - never loosened y Winners permitted to run y Always some giveback on exit


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