Trend Following Manifesto

For an assortment of reasons, there was no exact Turtle student number back when Dennis hired his crew. Even among Turtles it is debated today. My paperback version of “The Complete TurtleTrader” comes out in February and the subtitle has been changed to say 23 Turtles on the cover. That is the common number thrown around after all these years, but if I had my way I would have said “20+” instead of “23″. Call me anal or call me picky, but all aspiring writers should know that publishers often take steps that authors are not completely on board with! Oddly, the areas where publishers always get mucked up in are book titles and book cover design. Generally, they steer clear of what’s between the covers. I could definitely write a book on writing and publishing a book.

La Mere Vipere, often called the world’s first punk dance club, opened in Chicago in 1977. It subsequently burned down in 1978. At that bar not yet a Turtle Lucy Wyatt met Richard Dennis’ brother Tom Dennis (also a trader). There is a very good chance the Turtle experiment would never have happened if not for that random chance encounter between Lucy Wyatt and Tom Dennis (more on that to come). And that chance encounter surely included the Sex Pistols’ Johnny Rotten belting out at least once that night “God Save the Queen“.

More for those Sex Pistols fans out there.

I had the opportunity to spend four hours tonight with Turtle Lucy Wyatt Mattinen in Reston, Virginia. While we did not speak for the hard cover edition of my book, Wyatt Mattinen’s interview added great detail for a new Afterword that will appear in the 2009 paperback edition.

In “The Complete TurtleTrader” one of the two female Turtles elected not to be interviewed. Maybe that interview is closer to reality today as I just noticed that Liz Cheval is paying ad dollars to Google for the term “Michael Covel.” That is a nice endorsement of “The Complete TurtleTrader!”

Michael Carr was an original Turtle. Before being hired as a Turtle by Richard Dennis he was a writer and game designer known for writing Fight in the Skies and Don’t Give Up the Ship! (I am not familiar with these, but clearly there is a following!). Carr later joined Dungeons & Dragons and wrote In Search of the Unknown. Today, Carr writes for American Snowmobiler Magazine while residing in Wisconsin. Why post this? It just reinforces the diversity of Turtles selected.

Feedback in tonight:

Hello Michael, I’ve just finished reading The Complete TurtleTrader with great pleasure. I traded on the floor of the Mid-Am from the last few months it was located at the Fisher Building until 1976, when (having made my entire, if modest, living with about $2,000 of capital for a few years) I finally got too worried about possible out-trades (only one of which could have wiped me out) and sold my seat. I was, and remain today, an extremely conservative but fairly consistently profitable trader, by commodities standards. Of course Rich Dennis was something of a legend even back at the old Fisher Building location by the time I’d arrived. It was generally known that he engaged in inter-market spread trading, mostly in grains in those days, since he could then get reduced margins. Then, when Dennis started trading what seemed to be really bizarre inter-market spreads, such as wheat and silver, the old-timers scoffed mightily. But his strategy of buying the stronger of two trending markets had obviously worked - that was clear to anyone who’d been watching his career at that point. Soon after MACE moved to Jackson Blvd,, of course, Dennis moved across the street to the BOT, though he kept his MACE seat for quite some time after that. I well remember the MACE secretary accosting Dennis, who’d come on the floor from the BOT one afternoon after closing, loudly complaining that Dennis never deposited his daily clearing house checks. A few of us gathered around as a slightly chastened Dennis went to his trading desk, pulled open an unlocked drawer, and retrieved something like $50,000 in undeposited checks. He just didn’t seem to pay much attention to his MACE business by that time. At any rate, your book was both informative and entertaining. Thanks! [Name withheld]

Nice piece of insight. Thanks!

One Turtle I was unable to find during my book research process is 2nd from the left:

Today he is an accomplished guitarist specializing in latin, acoustic and Klezmer music (sample). He is the only original Turtle currently with a MySpace.com page. Is he trading still? As I mention in my book I was told by one Turtle, who still manages money publicly for clients, that Svoboda probably has the best returns for any Turtle since 1988. From YouTube:

How many students at San Diego State realized that day the guy playing guitar in the court yard knew more about trading and making money than the entire business faculty at the university?

The following true/false questions were sent out to the second group of Turtles. These questions were used to help decide who was picked and who was not:

1. One should favor being long or being short whichever one is comfortable with.
2. On initiation one should know precisely at what price to liquidate if a profit occurs.
3. One should trade the same number of contracts in all markets.
4. If one has $100,000 to risk, one ought to risk $25,000 on every trade.
5. On initiation one should know precisely where to liquidate if a loss occurs.
6. You can never go broke taking profits.
7. It helps to have the fundamentals in your favor before you initiate.
8. A gap up is a good place to initiate if an uptrend has started.
9. If you anticipate buy stops in the market, wait until they are finished and buy a little higher than that.
10. Of 3 types of orders (market, stop, and resting), market orders cost the least skid.
11. The more bullish news you hear and the more people are going long the less likely the
uptrend is to continue after a substantial uptrend.
12. The majority of traders are always wrong.
13. Trading bigger is an overall handicap to one’s trading performance.
14. Larger traders can “muscle” markets to their advantage.
15. Vacations are important for traders to keep the proper perspective.
16. Undertrading is almost never a problem.
17. Ideally, average profits should be about 3 or 4 times average losses.
18. A trader should be willing to let profits turn into losses.
19. A very high percentage of trades should be profits.
20. A trader should like to take losses.
21. It is especially relevant when the market is higher than it’s been in 4 and 13 weeks.
22. Needing and wanting money are good motivators to good trading.
23. One’s natural inclinations are good guides to decision making in trading.
24. Luck is an ingredient in successful trading over the long run.
25. When you’re long, “limit up” is a good place to take a profit.
26. It takes money to make money.
27. It’s good to follow hunches in trading.
28. There are players in each market one should not trade against.
29. All speculators die broke
30. The market can be understood better through social psychology than through economics.
31. Taking a loss should be a difficult decision for traders.
32. After a big profit, the next trend-following trade is more likely to be a loss.
33. Trends are not likely to persist.
34. Almost all information about a commodity is at least a little useful in helping make decisions.
35. It’s better to be an expert in 1-2 markets rather than try to trade 10 or more markets.
36. In a winning streak, total risk should rise dramatically.
37. Trading stocks is similar to trading commodities.
38. It’s a good idea to know how much you are ahead or behind during a trading session.
39. A losing month is an indication of doing something wrong.
40. A losing week is an indication of doing something wrong.
41. The big money in trading is made when one can get long at lows after a big downtrend.
42. It’s good to average down when buying.
43. After a long trend, the market requires more consolidation before another trend starts.
44. It’s important to know what to do if trading in commodities doesn’t succeed.
45. It is not helpful to watch every quote in the markets one trades.
46. It is a good idea to put on or take off a position all at once.
47. Diversification in commodities is better than always being in 1 or 2 markets.
48. If a day’s profit or loss makes a significant difference to your net worth, you’re overtrading.
49. A trader learns more from his losses than his profits.
50. Except for commission and brokerage fees, execution “costs” for entering orders are minimal over the course of a year.
51. It’s easier to trade well than to trade poorly.
52. It’s important to know what success in trading will do for you later in life.
53. Uptrends end when everyone gets bearish.
54. The more bullish news you hear the less likely a market is to break out on the upside.
55. For an off-floor trader, a long-term trade ought to last 3 or 4 weeks or less.
56. Other’s opinions of the market are good to follow.
57. Volume and open interest are as important as price action.
58. Daily strength and weakness is a good guide for liquidating long-term positions with big profits.
59. Off-floor traders should spread different markets of different market groups.
60. The more people are going long the less likely an uptrend is to continue in the beginning of a trend.
61. Off-floor traders should not spread different delivery months of the same commodity.
62. Buying dips and selling rallies is a good strategy.
63. It’s important to take a profit most of the time.

Short Answer Questions

On the back of the true/false answer sheet, please answer these questions with one sentence each.

1. What were your standard test results on college entrance exams?
2. Name a book or movie you like and why.
3. Name a historical figure you like and why.
4. Why would you like to succeed at this job?
5. Name a risky thing you have done and why.
6. Explain a decision you have made under pressure and why that was your decision.
7. Hope, fear and greed are said to be enemies of good traders. Explain a decision you may have made under one of these influences and how you view that decision now.
8. What are some good qualities you have that might help in trading?
9. What are some bad qualities you have that might hurt in trading?
10. In trading would you rather be good or lucky? Why?
11. Is there anything else you’d like to add?

In “The Complete TurtleTrader” I tell the story of seeing Jerry Parker’s original office outside Richmond, Virginia for the first time. Just finding the place was an adventure. While Richmond was only ninety miles from my house and I had a street address, there were no MapQuest turn-by-turn driving directions available around 1994. I used a good old-fashioned hard copy map from AAA. While I got down to the general area in ninety minutes, I spent another two hours in rural Virginia trying to find his office.

Finally, I stopped into a local country bank and asked if they had ever heard of Parker’s firm Chesapeake Capital (remember, I had no appointment to visit Chesapeake, I was just dropping in, hence I did not know where I was going). At first I was met with blank stares in the bank, but then one lady said that Chesapeake might be a ‘mile up the street’. She was right. Upon reflection I was struck by the fact that while she kind of knew where Chesapeake was located she had no clue what they did. She was probably making $35,000 a year (nothing wrong with that), but at the same time Jerry Parker was literally a baseball throw away making $35 million a year. While I might sound manic, my first thought was just to shake her and say, ‘don’t you get who is working down the road? Forget teller jobs, go be an intern for Parker!’

I did not meet Parker that summer day. My first face to face did not come until December 1995 at Parker’s new suburban Richmond office (about 18 months later). I had pestered him for an informational interview for some time, and finally his assistant Jonathan Craven responded with the good news that my persistence had paid off. Parker’s private office was surprisingly barren except for a small glass turtle on his desk. We talked about Wall Street in general terms.

Yet before the allotted 30-minutes was up, I did capitalize on the face-to-face opportunity by looking at Parker straight in the eye and asking for confirmation of who had won the Barings Bank sweepstakes earlier in the year. My proffer of a ‘name’, garnered a raised eyebrow, but his one word answer was confirmation. In that instant much of my understanding of trend following trading was solidified.

Later, the broker Parker recommended had me over to his suburban Richmond, Virginia home for chili. This broker was a transplanted Chicagoan who was clearly enjoying financial success in the Deep South (I remember his cool indoor pool). He was a broker archetype: a down to earth, everyman. At one point he mentioned that Parker had given pointers to one of his distant ‘relatives’ in trend following (the relative was by way of a distant marriage). It would be years before I knew he was talking about second generation Turtle Salem Abraham (who is in my book).

My path did not cross Parker’s again for years, long after the website TurtleTrader.com was established. For this visit, Parker, John Hoade, Keith Byers, his IT head and I met in his conference room at his Forest Avenue office. The furnishings of his sparse conference room gave no indication of what Chesapeake Capital did except for a huge Swiss alphorn leaning against the wall. Its ‘thank you’ engraving to Parker and Chesapeake Capital from a Swiss ‘concern’ spoke volumes about his firm’s reach.

Why the meeting with me to begin with? Chesapeake Capital was a billion dollar fund at the time, but they still wanted fresh ideas. They were investigating whether the Internet could enhance their business, and if so, how to best use it. Our meeting must have given them some good food for thought because shortly thereafter Parker sought to acquire the domain trendfollowing.com from me. It was a wise move not to part with it, since that domain name became a catalyst in launching my first book ‘Trend Following’ four years later.

Parker’s firm today has no web presence to speak of, but that has not hurt them. He is still far and away the most successful Turtle by a long country mile.

More to come.

Writing “The Complete TurtleTrader” was a roller coaster ride; a journey filled with unexpected insights from disparate sources, insights that often connected in unpredictable ways. At times it seemed as though I was playing a fantasy video game, where the secrets clues and hidden meanings kept popping up each step of the way. By the time the ride was over, it was clear that this was a story some people wanted told and others did not.

However, before my book there was a website. Most people probably don’t remember, but it was TurtleTrader.com that revived the Turtle legend for a new generation. Gibbons Burke of Futures magazine wrote back in 1998: ‘While the proprietors [of TurtleTrader.com] indeed are capitalizing on the Dennis trading legend, they do so in exceedingly good taste and without a trace of snake oil. The message is open, honest, straightforward and makes no hyped-up promises. It sticks to the facts. It is one of the best system trading sites for futures traders I have seen.’

Burke wasn’t the only one to notice TurtleTrader.com. David Penn weighed in from Technical Analysis of Stocks and Commodities magazine in 2003: ‘As one of the administrators of TurtleTrader.com suggested in e-mail, all Turtle trading amounts to, in the end, is trend-following. Indeed, there were successful trend-followers long before Richard Dennis and William Eckhardt’s Turtle trading experiment.’

Shortly thereafter my book project was launched and I quickly came up against resistance. Others had been down that road too. In conversation with Jack Schwager about his ‘Silence of the Turtles’ chapter in his book ‘The New Market Wizards’, he was quick to remind me how little substantive comment he received from Turtles when writing his books.

In 2006, however, it seemed things had finally changed. One Turtle said he would be happy to do an interview, by phone if necessary. Another said that he would be happy to discuss the Turtle experience. Another Turtle only wanted to provide written answers to questions. Yet another said he wouldn’t mind if the circumstances were right. Ultimately those responses resulted in thoughtful, incisive interviews.

Moreover, as the research process gained steam, the more Turtles I discovered. Names of Turtle students never before mentioned in the press popped up. For example, there was Rudolf Papirnik. Robert Moss, Dennis’ trading floor chief, called Papirnik a Turtle. Papirnik worked for Dennis before, during and after the Turtle program. He definitely had ‘Turtle knowledge’. Jim DiMaria backed Moss’ view on Papirnik as a Turtle too.

Many Turtles were quick to express their concern that Dennis would be portrayed as their primary if not only trading teacher. They didn’t want me to diminish the importance of Bill Eckhardt. Jeff Gordon was emphatic, ‘Bill [Eckhardt]. Very smart guy. It seemed like every time he spoke, I learned something. And they’re very few people in the world that I have ever met that I can say that about. I was always learning things from him.’

Another of the more interesting side notes of the Turtle program was genesis of their original nickname. Mike Shannon added a twist to the legend, ‘Our original name, in the first year of our existence, was the ‘Disciples.’ Because it was the name, at the time, of a prominent street gang on Chicago’s West Side, we agreed to go with the ‘Turtle’ idea.’ Accurate? Lucy Wyatt Mattinen, one of the two female Turtles, said the name actually traced back to a fondness by Dennis of the music group ‘The Turtles’! The Singapore Turtle story? Well, I have now heard three versions about the origination of the Turtle name!

Despite these colorful nuggets the big picture was that some Turtles just did not want an objective treatment of their story made public. For example, the confidentiality agreement signed years ago by all Turtles has long expired. The agreement, while not word for word in my book, is public. However, in 2006 when trying to interview Philip Lu, who was now working as a college teacher, I was thrown a curve ball. Lu, via his Edgewood College email address, was blunt, ‘It is my belief that my confidentiality agreement with Richard Dennis is still in force. Therefore I do not give interviews.’

Lu is an intelligent man (graduate of Brown). He made a lot of money as a Turtle and is well respected by many other Turtles. One Turtle sprang to Lu’s defense saying that he could have been in the same league as Parker and Rabar. ‘Phil actively chose not to take over a certain amount of money. He didn’t want to manage a billion dollars.’ Taking another perspective Sam Denardo clearly respected Lu for saying their confidentiality agreement was still in tact. ‘He knows that that system can still work. And the more people that use it, the less effective it’s going to be. He probably feels blessed like a lot of us that we’ve had the experience.’

The desire to keep things silent did not stop with Lu. During 2006, as I completed research for my book, I sent out final requests for interviews. Many Turtles agreed to talk. However, there were some no’s. One Turtle responded by asking who gave away his email address. Another Turtle responded via email that he was not interested. Months later that same Turtle appeared to warm up when his assistant asked for a list of those who had agreed to cooperate. A detailed response to that question brought back, ‘no.’

Unknown to me at the time that exact list was the one used to contact prior interviews to get them to stop talking (which did not work). Was I thinking that some of this reaction was beyond paranoid? Yes! I kept asking myself, ‘What could be so negative about their story? If they knew a book was being published why not get their story out there?’ Particularly since those who agreed to talk said they did so for that exact reason.

However, the book is out now and the reception, save for one Turtle, has been very positive. For example, yet another email from someone in the know came in unsolicited the other day. The subject of the email was “The Silence of the Turtles”:

Dear Michael:

XXX
XXX Capital

I asked that same individual if he/she liked my book. The response:

“Regarding your new book ["The Complete TurtleTrader"], I can say that after hearing the turtle story many times from many of the people that are part of the story and after reading many articles about such story, this is by far the most entertaining, inspiring, extensive, and honest story of the turtles I have ever read.”

It is nice to hear the positive feedback, but I still wonder about the energy expended to try and keep assorted Turtle details locked away. Some Turtles definitely lost sight of the big picture - their great inspirational story and tremendous success (at least for most Turtles). That said, I always knew criticism would come my way from a minority. So what, that’s healthy. The outspoken billionaire Mark Cuban has said:

“The easiest thing in the world to avoid is criticism. All you have to do is nothing. For those of us who set goals and want to have an impact in the business world in particular, criticism is part of the job description. You have to be able to be able to take it and sometimes you can’t be afraid to dish it out. If someone puts in the effort and challenges the content and makes me rethink my position, I come out ahead.”

I agree 100%. The positives and the negatives of the Turtle story are what make it both entertaining and memorable.

More to come.

As I mention in my book there were two female Turtles. This was news to many as the lone female Turtle for all these years had been positioned as Liz Cheval, but my research showed that to be incorrect. Lucy Wyatt Mattinen was a Turtle as well. And it was other Turtles who were the source of confirming Wyatt Mattinen’s Turtle existence. But like everything with the Turtles there was a more detailed back story!

I state in my book that Cheval elected to not speak for “The Complete TurtleTrader”. She did, however, email me during my book writing process:

Michael,

Thanks.
Liz

Worse than Cheval saying “no” was not even being able to find Lucy Wyatt Mattinen to ask her for an interview during my book writing process. However, once the book was published I quickly heard from Wyatt Mattinen. She was incensed that she was described as “doing her nails” by another Turtle. In no uncertain terms she educated me about her long time involvement with Rich Dennis and Bill Eckhardt. She laid out her trading successes. Clearly, Wyatt Mattinen, while not an active fund manager today, has lived an interesting life. While she did not agree with the “nails” comment she did state in no uncertain terms that my book was bullseye accurate

However, little did I know I had stirred the pot by declaring that there were two female Turtles. In fact, my December 2007 article in Trader Monthly revealed the unexpected. Trader Monthly, in verifying my article details with Cheval, was told by Cheval that she was the only female Turtle. Trader Monthly stood by the notion of two female Turtles and referred to “women” in the article.

Why all of the detail? There are quite a few who are interested in the Turtle back story. For example, once my book galleys, the drafts, started making the rounds, feedback from one person in particular struck a chord. Bob Pardo is a seasoned trader. He is also a skeptic, the kind of person you want to read your book in order to understand the weaknesses. Pardo does not believe in praise as much as constant improvement. And, although his bluntness probably rattles many, his honesty was welcomed.

Pardo confronted me with a number of questions postulating why some Turtles were averse to talking and he wondered if there weren’t further lessons to be drawn from Dennis’ managed money efforts. He also saw the apparent paranoia from some Turtles as interesting and worthy of further exploration. So in many ways the back stories I have posted are in response to the likes of Pardo and many others who have asked questions since my book’s release.

More to come.

Right when I think I know something, I am not so sure. Legend? Dennis/Singapore/Turtle breeding farm. Now, one of the players square in the middle of the whole Turtle world, someone who did not talk until after my book was out, says the Turtles came from Rich Dennis’ fondness for the music of the Turtles. Is this a minor point? Yeah, but a fun one! However, given the behind the scenes drama in bringing this story to life, not so sure all of the Turtles (the traders) are singing the lyrics to the Turtles (the rock group) best song, “Happy Together”:

Imagine me and you, I do
I think about you day and night, it’s only right
To think about the girl you love and hold her tight
So happy together

So happy together
How is the weather
So happy together
We’re happy together
So happy together
Happy together
So happy together
So happy together (ba-ba-ba-ba ba-ba-ba-ba)

I had a two and half hour lunch today with an original Turtle who had some funny recollections about his Turtle days. He chuckled at two ways people tried to win Dennis’ attention. Some women actually sent nude photos of themselves in an effort to be hired as a Turtle. Better yet one guy sent two coconuts with a note that said, “If you have the balls to hire me, I have got the nuts.” None of these people were hired.

A review of my new book:

Turtle Trading Lessons From Michael Covel by Brett Steenbarger

Few legends in trading have been as enduring as that of the Turtles. The Turtles were traders in the 1980s trained in a trend-following methodology by Richard Dennis and William Eckhardt. The traders came from a variety of backgrounds; most had no background whatsoever in financial markets. Dennis championed the cause of nurture: he believed that great traders could be made. Eckhardt took the other side of the bet, and the Turtle experiment was on.

The Complete TurtleTrader, Michael Covel’s engaging and well-written account of the Turtles, covers not only the experiment, but a second generation of Turtles who were inspired by the Dennis/Eckhardt vision. One of the most interesting segments of the book covers Salem Abraham, who by chance met one of the original Turtles, took a 180 degree life turn, and began his own highly successful fund. It’s a powerful illustration that, though markets have changed since the 1980s, the dynamics of success have not.

Covel’s book reads more like a piece of financial journalism than I expected, and I mean that as a compliment. It is this well-rounded perspective that makes “The Complete Turtle Trader” complete and a definitive contribution to the trading literature. He has clearly researched his topic and sources his quotes. He also casts a critical eye on his subjects, investigating why some Turtles found long-term success and why others didn’t. A very enlightening portion of the book concerns Richard Dennis himself, the ending of the Turtle experiment, and the master’s departure from his own trading rules and principles.

For those wanting access to the Turtle philosophy and rules, they’re laid out clearly and unflinchingly. This is not a methodology for the faint-hearted, which is one reason so many Turtles and would-be Turtles have not stuck with it. Large drawdowns inevitably accompany the quest for large gains, and it’s those large gains that ultimately provide trend following with its edge. Investors who place their money in funds simply don’t want to see 20% of their money evaporate in a quarter. This inevitably leads money managers to refine (and ultimately eviscerate) the Turtle methodology.

Many of Covel’s themes will ring true to readers of this blog, including the role of deliberative practice in the acquisition of trading expertise and the importance of emotional resilience and entrepreneurial spirit in sustaining a trading career. My impression, reading the book, is that Covel is under no illusions: the methodology, which provides the statistical edge in trading, is necessary but not sufficient for success. After all, the Turtles started with the same methods; some made it, others didn’t. Covel’s segment discussing what separated a successful Turtle, Jerry Parker, from his less successful peers is perhaps the most insightful portion of the book.

Because Covel so clearly lays out these ingredients of success, his book is relevant not just to trend traders, but to anyone who aspires to greatness in the markets. The message is clear: to win, the odds must be in your favor, and you must have the fortitude to keep playing, remain consistent, and compound your edge. That’s a formula for success in any field of endeavor, which may be why the Turtle story finds universal appeal.

And, by the way, for readers who want to dig a little more into Turtle trading before purchasing Michael’s book, I recommend his website. There are quite a few resources there, including articles on money management and trend following.

Source: Brett Steenbarger’s Site

Liz Cheval, one of the Turtles, was blunt:

“The most interesting, thing about the Turtle program was observing who succeeded and who did not.”

Since the Turtles went out on their own in 1988, the performance numbers (see charts below) show the top Turtles:

1. Jerry Parker (Chesapeake)
2. Paul Rabar (Rabar)
3. Liz Cheval (EMC)
4. Howard Seidler (Saxon)
5. Tom Shanks (Hawksbill)
6. Jim DiMaria (JPD)

Those 6 Turtles are the ones with the continuous track records back to 1984 and 1985. From a trading perspective - they are the Turtle winners. One of those six told me that the most successful Turtle in terms of performance since 1988 has been Jiri Svoboda, but Svoboda has no public fund and remains invisible. Other former Turtles have portrayed an image of success with no real results, but in terms of trading this group of is it.

Month by Month Data: William Eckhardt
Month by Month Data: Tom Shanks (Turtle)
Month by Month Data: Mark Walsh (Turtle 2nd Generation)
Month by Month Data: Liz Cheval (Turtle)
Month by Month Data: Paul Rabar (Turtle)
Month by Month Data: Jerry Parker (Turtle)
Month by Month Data: Howard Seidler (Turtle)
Month by Month Data: Jonathan Craven (Turtle 2nd Generation)