Slow Turtle System

Turtle trading system originally developed by Richard Dennis and William Eckhardt and now being used by possibly hundreds of hedge funds to manage currencies, stocks, and commodities.

They made a bet and then used very minimal criteria to select a group of students to teach.

These students became the original “turtles” (named after the Turtle system that they were taught) and most of them went on to manage fairly impres- sive funds. All of them were sworn to secrecy about the details of the original system. However, I doubt at this point any of them use that original

system and if they do, it is certainly not the version we want to be using, the Turtles trade trends.

Basically, if a commodity or stock is breaking to new highs, the idea is that that momentum should continue and you should just ride the asset until it is no longer making new highs. By trading a basket of uncorrelated markets, you can take advantage of the fact that at any given point, some where in the financial universe, something is in a bull market.

Trend-following can offer huge returns. If you catch close to the beginning of a huge bull move in a market, the returns on that trade can be multiples of 100 percent. Similarly, the drawdowns can be enormous. Dennis himself has gone in and out of the hedge fund business several times, most recently closing shop in 2000, primarily because his drawdowns have been immense and clients have withdrawn money. The key to success in a trend-following system is not in picking the right entries and exits, but merely staying in the game to be able to withstand the drawdowns. That said, if one chooses a basket of assets carefully so that they are as uncorrelated as possible, it may be possible to smooth out drawdowns. We will see a simple example of that possibility in a bit.

The version presented here is based onone told to me by a manager of a multibillion-dollar trend-following fund. Al-though most of the systems presented in this book are short-term countertrend systems, I do think a properly diversified trading strategy should

include some trend-following component. This is the system I currently use:

Buy if an asset’s 22-week closing simple moving average crosses over its 55-week closing moving average; buy at the market open the next

Monday.

Sell if an asset’s 22-week closing simple moving average crosses under its 55-week closing moving average; sell at the market open the next Monday.

Note the simplicity of the method. The more complicated a system is, the more likely it is to suffer from severe curve fitting. Basically, I am not as interested in using complicated methods from quantum mechanics to identify trends. If an asset is moving up so that its slow- and fast-moving av-

erages are moving up, then I am happy to say it is trending.

Why no shorting? As we have seen in Technique 5, shorting is not necessarily the opposite of going long. Along with the fact that the markets have a natural bias to move upward over the past one hundred years, your upside is also capped at a 100 percent. When following a long-term trend following system, it is possible to have trades that make well over 100 percent. Also, if you choose your basket of assets correctly, you can be going long some assets, while other assets are on their downtrends.

EXAMPLES

S&P 500, June 1958 to June 1961

The lowest line in Figure 1 represents the 55-week moving average. The line directly above it represents the 22-week exponential moving average.

On June 23, 1958, the lines crossed, and we bought at the open of the next week holding until the bottom line crossed under on May 2, 1960, when we closed out the trade for a 19.6 percent profit. The market seesawed for a year or so afterwards before we bought again on January 3, 1961, at the start of the next bull market that lasted throughout the 1960s.

Slow Turtle System

S&P 500, July 1987 to May, 2003

Of course, no trend-following system would be worth its weight in salt if it did not capture the trend that occurred throughout the 1990s as shown in Figure 7.2. As seen in the figure, the system was long the market from February 19, 1991, right after the Gulf War, until December 11, 2000, for a 271 percent return. (Also see Table 7.1, Table 7.2 , and Table 7.3 .

You can, of course, run this system on stocks. Table 7.3 shows the results of the system on Nasdaq 100 stocks, starting with $1M and using 2 percent of equity per trade. The system was almost always in the market and had, of course, its equity peak at the peak of the bull market in 2000 (see Figure 3, ).

Figure 4 shows the annual returns of the system.

Using the Turtle system on stocks, you would have been able to maximize the advantages of the bull market while keeping drawdowns some what low in the bear market even though they existed. Notably, despite being a horrible year for the broader market, 2001 was up 8 percent in this system. The annual returns are shown in Table 4.

Results for Turtle System on the S$P 500

S&P 500 Weekly chart Turtle System

Trades for slow Turtle on S&P 500

Looking at Figure 5 , an analysis of the maximum adverse excursion (the amount a trade went negative before closing out), the light gray trades represent the trades that eventually were closed out as profitable trades but underwent a drawdown in the process. One trade was as much as 40 percent down before returning to profitability, and 17 trades were between 20 percent and 40 percent down before returning to prof- itability. We can see in the results that the maximum drawdown from peak to low was slightly over 58 percent. Nevertheless, this system greatly out performed the market from 1998 to 2003 and was able to benefit massively during extreme bull market moves. Again, having a trend-following system in your arsenal is an important weapon in addition to the various countertrend systems we have demonstrated in this book.

Simulation of Slow Turtle on the Nasdaq 100

Figure 4 Slow Turtle 

Figure 5 Slow Turtle Winning Trades