Turtle Trading Course

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Turtle Trading Techniques TABLE OF CONTENTS

Introduction and Setup 7

Risk Disclosure Statement 8

Family Tree of Trend Followers 9

Support 10

Cd-rom Setup 11

Software Solutions 11

Daily Data and Signal Preparation 12

CTAElectronic Data 13

Quotes and Data 14

Basics Section 15

Client and Visitor Comments 16

TurtleTrader Visitor Comments 19

TurtleTrader Client Feedback. 21

TurtleTrading System 23

TurtleTrading System and Philosophy 24

Background 25

Mathematical Expectation.... 26

Main Turtle Rules... 28

Volatility Introduction... 30

Risk Determination and Units.. 33

Risk of Ruin... 36

Unit of Reduction Rules.. 38

Unit Pyramid Scheme in ATR Terms.. 40

Entry & Exit Signals... 41

Stops and Liquidation Criteria.. 43

Portfolio Diversification.. 47

Portfolio Selection/Correlation. 49

Example Historical Charts Where Turtles Won Big. 50

Equity Curve & Analysis Training. 60

Alternate Money Management Scheme for Comparison. 62

Gambling... 65

Money Management... 67

Equity Methods For Account Value. 69

Fixed Money Per Unit Model 69

Equal Units Model. 70

Percent Risk Model. 70

Periodic Money Management Adjustments Model 70

Margin to Equity Model. 71

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Equity Change Adjustment 72

Entry Concept With Options 72

Combination Turtle Example (Volatility) 72

Alternate Money Management Models 76

Articles. 81

Barings Bank 85

John W. Henr Elaborates. 87

FIA Futures and Options Expo 94. 89

Barings Lossis Your Gain. 91

Q&A session with John W. Henry. 91

John W. Henry Programs. 92

Turtles Revisited.. 94

Sjo Trading Philosophy and Methodology. 96 The Wisdom of Diversification is Far from a New Idea. 97 What's the Problem with Fundamental Analysis 98

Correlation Charts 99

Futures Margin Issues 101

Asset Return Comparison 102

Donchian Trading System 103

News Articles About Trend Followers 110

An Introduction to C&D Trading Co 118

Richard Dennis Interview. 119

Jerry Parker Interview.. 121

David Cheval Comments. 122

Kelly Formula Article.. 123

Quotes.. 124

Resources. 127

Offshore Information. 128

Why Incorporate Offshore. 129

Using an Offshore Company to Encumber U.S. Company's Assets 130

Offshore 101 131

IRS101 132

Offshore Trusts... l39

The Advantages of an Offshore Trust... 140

Earnings and a Faster Accumulation of Wealth... 140 Requirements to Establish a Non-Swiss Resident Corporate Account 141

Commodity Accounting Systems.... 142

Surveillance Technology Group... 143

ViaCrypt... 143

Managed Funds Association... 145

CISDM - Center for International Securities and Derivatives Markets 147

Commodity Compliance Services, Inc... 148

British West Indies Securities Company Limited... 150

The Citgo Group Limited.. 154

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Meespierson... 160

Custom House Asset Management Ltd. 170

LaPorte Asset Allocation System.. 173

HedgeScan™... 178

International Traders Research Inc. 181

TASS Management Ltd.. 182

Offshore Fund Services.. 190

Futures First Software, Inc... 191

Appendix.. 193

TurtleTrader Recommended Selections.. 194

Order Techniques and Procedures.. 196

Receipt and Preparation of Orders. 196

More Portfolio Examples for Futures. 202

Drawdown Table.. 202

Glossary.. 203

Buy & Sell Graphic.. 204

Charts.... 205

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Introduction and Setup

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Risk Disclosure Statement

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware of the following:

If you purchase a commodity option, you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity future or sell a commodity option, you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a "limit move." The placement of contingent orders by you or your trading advisor, such as a "Stop-loss" or "Stop-limit" order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. A "Spread" position may not be less risky than a simple "Long" or "Short" position. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. In some cases, managed commodity accounts are subject to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets. This brief statement cannot disclose all the risks and other significant aspects of the commodity markets. You should therefore carefully study commodity trading before you trade. Transactions of markets located outside the U.S., including markets formally linked to a U.S. market may be subject to regulations which offer different or diminished protection. Further, U.S. regulatory authorities may be unable to compel the enforcement of the rules of regulatory authorities or markets in non-U.S. jurisdictions where your transactions may be effected. Before you trade you should inquire about any rules relevant to your contemplated transactions and ask the firm with which you intend to trade for details about the types of redress available in both your local and other relevant jurisdictions.

For more disclaimers see:

http://www.turtletrader.com/li.html

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Family Tree of Trend Followers

Is the Turtle Trading method a secret? No, it's not a secret. It is a method of trading that takes education. It takes study. It doesn't feel natural at first. However, you do have to leam properly and that's how we help. Plenty of people mistakenly think the method is a 20 day breakout and that's it. After you go through our course you will quickly see that breakouts make up a very small part of the overall method. The key as we discuss is money management.

Understanding the relationships of Turtle traders who manage money offers confidence to those new to the method. Make sure you review the correlation studies in our manual and on the web site that show the positive relationship in their returns. Lastly, we provide a general family tree of trend followers and their connections below:

The Big 5 Trend Followers

MillburnRidgefield Campbell and Co. Dunn Capital John W. Henry

Richard Dennis and William Eckhardt (Trained the Turtles}

Examples of Connected Relationship

Chesapeake Capital - Original Turtle Jerry Parker

Jonathan Craven (worked for Chesapeake for 8 years) Started trend following firm: "GIC, LLC"

Sent resume to TurtleTrader.com seeking employment options Worked for Meridian Capital (second generation Turtle) Brian Byrnes (worked for Chesapeake)

Started trend following firm: "Meridian Capital" David Moore (worked for Chesapeake) Now works for Campbell and Co. Kevin Brandt

Started Commodity Pool Operator James River Capital Worked in same building as Chesapeake Invested capital in Chesapeake and Meridian

Salem Abraham

Started Abraham Trading Closely associated with Jerry Parker since inception of his firm.

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Sjo - Original Turtle StigOstgaard James Cypher (worked for Sjo) Now works for Dunn Capital BrunoSchneider (worked for Sjo)

Started Mayflower Capital

Hawksbill - Original Turtle Tom Shanks

PabloHoffer (worked for Hawksbill)

Sent resume to TurtleTrader.com seeking employment options

Rabar - Original Turtle Paul Rabar Jeff Izenman (works for Rabar)

Previously Worked for EMC Capital an Original Turtle run by Liz Cheval.

Obviously, there are many more examples of these relationships. But, this listing gives you an idea real quick that the Turtle teaching process never stopped! Many Turtles have been born over the years...

Support will arrive via email: [email protected]

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We have been assisting clients online since 1996. TurtleTrader's claim to fame was it's news coverage of the global debacles Barings and Metallgesellschaft. The client response from these stories helped to galvanize interest in our firm and the unique insight we bring to the table. Interestingly, one of the largest Turtles assisted in confirming the Barings research we developed. But, neither of these stories, from the TurtleTrader.com perspective, ever made it to the main stream press. Even today!

TurtleTrader.com continues to offer insight to press and industry players across the globe. We have provided insight for publications ranging from The Wall Street Journal to Japan's Nikkei(NihonKiezai Shimbun) to Institutional Investor. Recently we have even provided insight to original Turtles to better assist them in locating clients across the globe.

Note on Support

If you have any questions, concerns or confusion about this package you need to seek support from TurtleTrader immediately. The main aspect of our firm is support. We give you the ability to send off an email and get your questions answered fast. This is our 4th year of providing on-line support. Please don't expect this manual to be everything, you have paid for ongoing support too! Our client base ranges from new to advanced; we expect questions and respond typically within 24 hours.

Patience is key. If you are new - don't assume you will understand everything after one read. We are here to help. If you remain patient, we will remain patient in helping you. Keep in mind you have NOT just bought a manual, you have hired a consultant to train you.

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You will find our readings list on the web page good starter material. For example, you will be helped greatly by reading Market Wizards before starting this trading system. Will Market Wizards help you with techniques? No. But it will help to put you into the kick ass competitive spirit that you will need. Our readings list can be found at: http://www.turtletrader.com/readings.html.

Lastly, now that you have this manual please still consult with the web page; the numerous web examples and explanations will take on greater meaning with the rules of this manual.

Our guarantee, which you have agreed to, stipulates a (1) year long effort on your part to trade the techniques. These techniques take discipline to trade and patience. They are not get rich quick schemes. If you have ANY questions or concerns about the techniques, be patient - we will help at the first sign of difficulty.

Cd-rom

Setup

Cd-rom

Key and Instructions

Place Cd-rom in drive (Mac or PC). Read files through any application that reads text, i.e. Excel, Word, TradeStation, etc. Description of Turtle Trader Cd-rom Goto: http://wwsv.turtletrader.com/key.html. All files are text files unless otherwise noted. Need help? Support: support(S),turtletrader.com

Future Developments

In the near future we will place all data on the Cd-rom on our web site for clients only. You will be able to download the data at your leisure. Additionally, you will be entitled to free updates forever as you will have continued access to the web data sections. We will keep you advised on any developments.

Software Solutions

The following list of trading software providers may prove helpful. Don't forget these techniques can be implemented by hand or spreadsheet (Excel) if you so desire.

Omega TradeStation - http://www.tradestation.com (PC) EquisMetaStock - http://www.equis.com (PC)

LinnSoft Investor RT - http://www.linnsoft.com (PC/MAC) Trendsetter Software - http://www.trendsoft.com (MAC) Behold! - http://www.bhld.com (MAC)

LIM [Logical Information Machines] - http://www.lim.com (UNIX)

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Daily Data and Signal Preparation

You should use daily data for analysis. It is not difficult to do calculations manually if tracking a small portfolio. Automation, however, can make life easier!

At the end of each day - end of day data is acquired and signals for next day are generated. You then face each morning with a SET plan of what to do "if then" occurs. No guessing.

These techniques will not have you trading often though. Your office will have none of the high energy of a NY trading floor!

Barchart.com: http://www.barchart.com Prophet Finance: http://www.prophetfinance.com CSI: http://www.csidata.com

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CTA

Electronic Data

Every month of performance from each of the following Trend Followers since their inception is provided in electronic files. Additionally, a correlation table of(l) Turtles only and (2) of all Trend Followers is provided. Gain confidence by going through these files looking at the correlated performance. If you have trouble here please remember to consult the web page for the many explanations of correlation.

1. Abraham Trading - Jan 88 - 2nd generation Turtle

2. Adam Harding & Lueck (London) - Jan 87 - Trend Follower 3. Campbell and Company - Apr 83 - Trend Follower - (6 programs) 4. Chesapeake - Feb 88 - Turtle - (3 programs)

5. Dennis Trading - May 94 - Richard Dennis

6. Dunn Capital - Nov. 84 - Trend Follower - (4 programs) 7. EMC Capital - Jan 85 - Turtle

8. Eckhardt Trading - Jan 87 - Richard Dennis Partner - (2 programs) 9. Hawksbill Capital - Jan 85 - Turtle

10. John W. Henry - Oct 82 - Trend Follower - (8 programs) 11. JPD Enterprises - Jan 85 - Turtle

12. KMJ Capital - Dec 89 - 2nd generation Turtle (3 programs) 13. MC Futures - Sep 89 - Turtle

14. Martin Money Management - Apr 83 - Trend Follower - Dunn program 15. MillbumRidgefield - Feb 77 - Trend Follower - (4 programs)

16. PWA Futures - Aug 93 - Trend Follower - DCS II 17. Rabar Market Research - Jan 85 - Turtle

18. Saxon Investment Corp. - Jan 84 - Turtle - (2 programs) 19. Simons Capital - Apr 92 - Trend Follower - Dunn Associate 20. Sjo - Feb 89 - Turtle - (2 programs)

22. Trendstat Capital - Dec 87 - Trend Follower - Tom Basso 23. Mark J.Walsh - Jan 85 - 2nd generation Turtle - (2 programs) 24. Willowbridge Associates - Feb 88 - Trend Follower - (9 programs) 25. Wizard Trading - Sep 90 - Trend Follower - Jack Schwager (2 programs)

A complete data series with 23 trading firms including 58 programs. This is a wealth of data for easy analysis within EXCEL or other trading packages.

These are text files that can be easily opened and read into most any application capable of reading text. Remember, this data will arrive via email from Turtle Trader. If you did not receive it, please contact support at [email protected]

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Quotes and Data

Quotes in these days of the internet are often free. Of course, newspapers provide a good source of quotes too, i.e. Wall Street Journal, Investor's Business daily, etc.

BMI:http://www.bmiquotes.com

Data Broadcasting Corporation: http://www.dbc.com Quote.com: http://www.quote.com

CSI: http://www.csidata.com

Prophet Finance: http://www.prophetfinance.com

Trend following Turtle techniques typically rely on end of day data for signal determination, but many traders do use intra-day data for signal initiation.

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TurtleTrader Basics Section

Everything we provide is written to provide a story of how to. Study the mathematical techniques, the historical data, the CTA performance data and our web site - that is the only way to pull it together into a cohesive Turtle trading strategy you will be confident in.

http://www.turtletrader.com/basics.html Additional links for beginners to consult:

Microstrategy Example

http://www.turtletrader.com/indicator.html Stock Chat Junk

http://www.turtletrader.com/nodaytrade.html Warren Buffett

http://www.turtletrader.com/buffett.html David Faber

http://www.turtletrader.com/faber.html

Futures Spreadsheet Archive from Gibbons Burke ftp://ftp.io.com/pub/usr/gibbonsb/futures

Email Update

http://www.turtletrader.com/list.html Make sure you signup at our list server to get automatic email updates.

Paper Trading

Depending on your level of accomplishment in trading, a period of practice or paper trading is advised. Simply following and keeping track of a portfolio without using real money will help confidence in the approach. One service you may want to explore is Auditrack at: http://www.auditrack.com/

At the very least practice examples involving the data supplied on the CD-ROM should be worked through until confidence in the technique is strong.

Web Site Reviews

http://www.turtletrader.com/button.html

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Client and Visitor Comments Recent Emails Received

1. From a client offering feedback on support received; To: "TurtleTrader" mfo(a).turtletrader.com Date:

Wed, 3 May 2000

Thank you very much for the suggestions! I TRULY appreciate the quick and "to the point" responses. If any potential customers have questions in regards to client support, I will glady recommend the the site and acknowledge the professionalism of the staff. I will paper trade a few months and then start with stocks and midam contracts as suggested. If you need any references in regards to the follow-up support that you provide, again I would be happy to answer any skeptics!

Thanks, Nathan

2. From a web visitor who talks about gamblers: To: '"TurtleTrader"'info(Sturtletrader.com Date: Tue, 9 May 2000

...it's apparent from your site that you guys don't mince your words. I guess for every trend-follower there's a hundred gamblers who like to buy 'cheap' [stocks or commodities] and sell 'expensive'...trend-following is too counter-intuitive to be employed by the majority [precisely why it works so well].

3. From a web visitor concerned about not having a method: To: info(S),turtletrader.com

Date: Sun, 7 May 2000 Dear Turtle Trader:

I guess I am conditioned to be skeptical of any "system", but your Turtle site has me intrigued beyond what I usually consider my better judgement. I have been trading stocks and options for 3 years now. I have no formal training, haven't ever been to any kind of investment/trading seminar, and have never purchased any trading system. I have accumulated a library of around 100 books that cover many aspects of the markets, methodologies, and trading in general.

My background is unique in that I have a degree in trumpet performance, yet professionally I am a Vice President of a company that makes and sells pickles and condiments. I also have an MBA. I am 31 years old.

I first stumbled onto the Turtles while on vacation in 1995 as I was relaxing in my chaise lounge on a small speck of a Caribbean island carefully reading both Market Wizard books and a few others. At that moment in time I hadn't the foggiest idea I'd actually be able to make real money by trading, but I knew I wanted to trade and I knew I could teach myself at least the basics. Since that time I opened an E*Trade account and have turned a $2000 account into around lOOx that. Now by any measure of

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TurtleTrader success this would be considered good, if not excellent but I am entirely disappointed because of my mistakes. If I had followed my plans on each trade I'd easily have lOOOx my original account. In any event, I think I have lots of room to improve.

I managed to escape the bulk of the Nasdaqselloff in April, but I wish I had the courage to play other markets or to play the downside to make money. For some reason I haven't been able to do this. I effectively played call options and some spreads during the speculative runup last fall, but I am having this "trader freeze" right now where I am scared to do anything after a couple of mistakes.

I need some kind of system. I don't trade 50x a day. And I don't trade everyday, but your system seems as though it might broaden my horizons so to speak. If it is true, that anyone can be taught your system of long-term trend following and it isn't just a buy and hold concept, then I am interested.

I am SO skeptical of systems. I have been all through your website, and it "looks" very good. But can you really show me how to make money in down markets and in ANY markets??...Can someone email me some

encouragement? I would like to become an Alligator and outperform all you Turtles.:-) As George Soros once said, "it takes courage to be a pig". Is your method the map to the hogpen?

Kindest Regards, Brian D.

4. From a web visitor asking about new accounts: To: info(g),turtletrader.com

Date: Tue, 9 May 2000 Dear Turtle Trading,

This has got to be the most prolonged reading session by computer that I have ever done, thank goodness for the speed reading course I did last year. Having once connected to your website I was glued to it. The information you provide seems to me to be the most realistic representation of profitable trading I've seen anywhere in my search for a successful trading education so far. Thank you your site itself was an education...

Presently I am involved in trying very hard to legitimize my previous purchase of a Gann based trading system but find that reading books from the early part of the last century written by a man who would have greatly benefitted by the services of a good proofreader and who definitely had a knack for writing in the most obscure fashion extremely arduous. What's more this company sounds similar to the ones mentioned in your website that have an introductory package that encourages you strongly to purchase more highly priced continuation

packages.

I feel I am destined to failure if I continue down this path as in future packages greater and greater emphasis is placed on calling probable market highs and lows in advance. I guess what I am asking in the above is - Is the Turtle Trading package readily understandable by someone with limited experience in the world of international money markets?

I do not have a great amount of free capital that I can commit to trading approx. $15000- $20000 would I be wasting my time pursuing trading at this stage...or would I be best advised to wait until I have attained more capital? I would be certainly interested in the product you are offering as the more that I read about trading the more I realize how important money management is in trading success and

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TurtleTrader certainly this is one message that comes across loud and clear in the material that you have presented. Thank you very much for taking the time to read this.

Yours sincerely, Peter B.

5. From a web visitor asking about automation: To: <[email protected]

Date: Sun, 12 Mar 2000

Hello, I would like to compliment you on your web site. I find it educational, informed stimulating and one of the best sites on the internet. I agree money management is an essential part of successful trading along with proper entry and exit signals. I know some of your competitors have packages that have automatic entry and exit signals. I would like to know with your entry and exit signals and using prophet charts can you also incorporate those signals so that each chart gives automatic entry and exit signals.

Thank you, JoeL.

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Visitor Comments

"Looking for hot pix of your favorite hedge fund managers? TurtleTrader.com sponsors fan pages—a la Tiger Beat—for many prominent traders, including George Soros [and others]." Paul Krugman

Professor of economics at MIT Wednesday, Nov. 3, 1999: Tiger's Tale The Leverage That Moved the World.

"That Abraham guy sure takes a good picture. He looks like an honest, hardworking individual. I've talked to his mother and she recently confirmed my suspicions. Regards from Canadian, Texas." Salem A. Abraham President Abraham Trading

Company

"Would your site be willing to provide a link to Campbell & Company in an appropriate area on your site?"

Cynthia Knight Campbell and Company

"Congratulations on an excellent site." Caspar Marney

Global Head of Technical Analysis, Foreign Exchange Swiss Bank Corporation - SBCWarburgDillon Read

"Your page is looking great and is a good addition for my users." Jim Payne

President Behold! System Testing Software

"You have a very good site and a nice, honest approach to marketing your products and services. Refreshing. I'm sorry I didn't visit the site sooner...[In his review he adds]...There are no hollow promises. Instead, every

statement asserting the power of these methods is backed up with empirical data and coupled with the caveat that the key to trading success is discipline, trading the markets every day and money management (or to 'preserve capital until more favorable price trends reappear'). This site offers no comfort to those who are looking for a quick buck or the Holy Grail, and the proprietors don't seem to suffer fools gladly. 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." Gibbons Burke - Futures Magazine Review Director of Technical Analysis Products Dow Jones Markets

"Effort is looked at by all and judged by few correctly. You are judged as with good intentions and integrity."

Art Simpson

for Phantom of the Pits Futures Magazine

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"Fascinating stuff. I work for one of the premier accounting firms in the commodity industry and work with many leaders in the industry (including several listed as examples on your pages). I have read both "Wizards" books and all of the people in the books share a common theme. Discipline & desire to win are more important than smarts. Kudos to you for an interesting site." Futures Industry Professional

"You have a very interesting trading web [site]. A complete overview about trend following system[s]. Congratulations."

President of IWTC

Italian WWW Traders Club

"You may be interested in a study on CTAs that I published. I basically find that there is one dominant trading style in all CTA funds. That style has been called "trend-following" style." He added: "It is not surprising that big moves occur in equities, bonds, currencies, and commodities at the same time. They are responding to the same set of economic fundamentals. I think the biggest selling point for trend followers is not so much that they make money, but they make money during down markets in equities. [Also] It is interesting that, when equities move down, there seem to be more and bigger trends in other markets for trend followers to capture. Because the profits captured by trend followers during these times are greater than during other times!" Professor of Finance, Duke University

"I must say that as anyone with a pulse, I was skeptical of your site. But the more I read, the more I'm convinced that you guys are serious and professional. Your website is like a breath of fresh air in a virtual world filled with get rich quick schemes [and] trading systems. Kudos on a fantastic site, not only is it bursting with info. it is very well crafted for navigating and aesthetically pleasing." Web Visitor

"Thumbs up on the design of the website. I've been in the futures industry for 8 years and found it informative and enjoyable." Web Visitor

"Your website is top notch and really a pleasure to read. It projects a clear & translucent picture of what your system is all about." Web Visitor

"First of all, I find your web sight highly informative and concrete. There is so much garbage out there in terms of vendors' claims and statistically insignificant trading ideas that it's very easy for the unsophisticated trader to get sucked by this crap. It's refreshing to visit yours." Web Visitor

"I am very impressed with your website. I was pleasantly surprised by the way you market your product. You suggest many educational books and studying before ever recommending a client order any of your products. I am in the process of reading a few of your selected titles. It is obvious only people serious about learning how to trade the correct way should think of ordering your product." Web Visitor

"Your web site on Turtle Trading is almost unbelievably extensive and entertaining. I know that myself and a number of other futures traders greatly appreciate its'existence." Web Visitor

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TurtleTrader Client Feedback

"Skeptical before [our] purchase. Your web site examples with Barings and the German firm gave true insight. [Our] extensive testing before trading gave our people confidence in the approach. Thank you for your straight forward service and insight."

"[The Turtle] money management algorithms have opened my eyes." "Your patience and speedy replies are rare in the business world today and are greatly appreciated."

"I am finding that the rules outlined in the manual do indeed make a lot of sense, e.g. there is no question that the filter rule enhances returns."

"I'm really impressed with all the help you've given me, it really has made a big difference. You should know that yours is the only program I've purchased. I'm exceedingly skeptical - 99.9% of the crap peddled as systems or in books is at best incompetent and at worst criminal. So it took about a week (and reading every single page of your web site) to purchase your materials, but they showed consistency and logic and common sense. I am glad I did -1 have really learned a lot."

"I appreciate the questions/support aspect of this package very much. I have recently decided to go on my own, and make a complete commitment to trading with the intention of forming hedge or futures fund once I gain more experience and a track record with my own account. My point is that I take this seriously, and I appreciate the help."

"The difference in your materials is that you stress actually what to do, rather than listing what not to do. Just because I know not to buy IPOsofbiotech companies with no assets, no sales and no earnings doesn't mean I have the knowledge to go out and be a value investor. Anyway I'm rambling, but I have found the materials helpful and I appreciate the one-on-one help you've given."

"The section on Turtles' money management will save me the purchase price in losses. After two or three reads, the section on risk and expectation clicked. Is was like a light coming on."

"Your product and services are the best I've seen since I've been in futures and commodities. I have been looking for a 100% systematic approach to trading that followed trends. Once I read about the Turtles, I knew that's what they were taught, and I wanted to know what they knew. These methods are what I've been looking for ever since I started in this field. I appreciate your patience and information that you have provided. Once again, thanks for the help you have provided."

"I'm backtesting the data you sent me [with the full package and it is a] very impressive amount of information."

"I regard spending the $1000 on the material as a worth while outlay because I got confirmation that the approach I was already taking was right [and] ultimately it was what propelled me to write the code for all the

simulations...[Also] the trend followers' trading results are very valuable, they provide an objective measure of whether a system is worthy of being traded in practice. My simulated results assuming realistic slippage are comparable."

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Turtle Trading System and Philosophy

Before detailing the precise rules of the Turtles, it is wise to elaborate on systems trading in general. Valid commodity or stock trading systems must first show more profits than losses over an extended period of time. (see trend follower CTA data for verification). Valid systems must have precise rules for each step of the trading process. This requirement for exact rules is necessary to eliminate judgment calls and make the trader's approach to the marketplace as mechanical as possible.

The Turtle methodology can best be summed up as "mechanical money and portfolio management adjusted by volatility with breakout entries diversified across many markets". Note, our de-focus on the breakout. The breakout into the trade is about 15% of the success when trading like a Turtle. The crucial element is the money and portfolio management.

To Reverse or Not?

Many people are adverse to trading the long term system the Turtles trade. This reluctance is simply a result of misinformation. Remember, profit and loss is proportional. A short term system that is perceived as less risky allows only small profits and small losses. But often many small losses add up to one big loss. Short term trading often leaves one without the needed reinforcement that you are indeed in the right direction of the main trend.

The Turtle system will not always have you in the market. The system is designed to take advantage of all major well defined trends. At the onset of a new trade, the approach keeps a loose stop, but as profits are secured they are protected by bringing up the stop with the direction of the termed. This process does not involve guesswork. The rules define the process precisely.

Other trend followers such as John W. Henry and Dunn Capital often remain in the market. This distinction is related to reversals. Turtles are not typically reversal traders. But Turtles and reversal traders such as Dunn and Henry often have the same correlations. Why? When markets trend all trend followers are poised to participate by the very nature of trend following. Follow the main trend!

Reversal traders (Dunn and Henry) are always long or short. A long position ends when a sell stop is hit and the position is then reversed to short. A short position always ends when the buy stop is hit and the position is then reversed to long. In the manual you will see the "filter" that differentiates the Turtles from reversal trend followers. Both techniques are completely acceptable as evidenced by the returns of the Turtles and the equally impressive returns of John Henry and Dunn Capital.

Risk Reduction

Risk reduction is key to trading like a Turtle. To minimize risk one should trade commodities or stocks that are independent of each other. Independence or non-correlation exists if there is no tendency for one to rise or fall when another commodity is rising or falling. This concept should not be taken lightly. Portfolio diversification is often the difference between winning and losing.

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TurtleTrader Background

Turtle trading assumes markets have trends. Dennis knew that no one could predict markets consistently over the long term. He also knew that, to get rich, you had to be in the market for the long term, so he reasoned that if there were trends, you had only to identify and then buy or sell into them. Pure Turtles never predict prices; they never forecast trends, they never act on hunches, intuition or tips. They don't anticipate markets, they react to them.

Turtles pyramid (i.e., add positions using unrealized profits as collateral) according to carefully worked out money management scheme. They don't pick tops or bottoms. This is a perfect example of the wisdom of the early 19th century British investor Nathan Rothschild, who said he was successful because, "I buy 'em when they're going up and sell 'em when they're going down."

Clearly, this requires logic and, above all, discipline. Portfolios are divided into percentage units and risk no more than 2% on any one trade. Thus, assume a $100,000 portfolio might purchase one bond contract, but a $1 million portfolio would purchase five. As the bond contracts gain in value, others are added. Turtles continually adjust their exposure.

Turtles gauge the value of each different contract by measuring its volatility. Thus, markets can be compared with each other on equal monetary or dollar-weighted terms. This allows positions of equal monetary weight and risk to be taken in all trending markets. By dollar weighting their initial positions, they are able to diversify their trades equally among the trending markets.

"The benefits of pyramiding versus the risks of ruin is that the best strategy is not some optimized weighting scheme, but rather weighting each indicator by 1 or 0. The same applies to trade selection either a trade is good enough to take, in which case it should be implemented at full size, or it's not worth bothering with at all."' Using money management stops, systematic diversification put Turtles in all the trends. Two thirds of Turtle trades result in finite arithmetic losses of 2% or less each. One third produce larger geometric gains because of pyramiding. This method of position management is based on what gamblers call "the risk of ruin" or the mathematical probability that over leveraging will increase the probable loss of your stake geometrically. Eckhardt taught the Turtles that if they reduced their positions when they were losing money they could counter the arithmetic progression towards ruin effectively. Cutting trading size during losing periods was designed to keep them probability that they would catch a trend. He argued that a disciplined taking of trades where

expectations were higher than inevitable losses would triumph in the long haul. Meanwhile, money management is a defensive tool. Since markets are exponential in nature. Turtles don't worry about linear decreases; even the slightest exponential curve will eventually surpass the steepest linear curve. Discipline, money management and patience triumph.

'Source: William Eckhardt

25 www.turtletrader.com Please send all support questions to [email protected]

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TurtleTrader

Mathematical Expectation

"Most people can't handle the uncertainty of a probability statement; it just doesn't sit well with them. [Hjuman beings have an innate tendency to believe they do not understand an event if it can only be reduced to a probability statement."1_{No, we are not going to get math heavy here, but it is crucial to understand trading and}

investing can be a gray area, it is not black or white. Put simply, a whole lot of money can be made if you only win 30% of the time as long as your winners are very big and your losers small.

Mathematical expectation is the foundation of the Turtle's successful approach to the markets. When one enters the market, an expectation of winning that is positive must be present. To enter the market without a market expectation or a negative expectation is to lose money. Suppose a coin flipping game is played. If it is heads you pay me 2 dollars if tails I pay you one dollar. The mathematical expectation for me is +50 cents and for you it is -50 cents. This scenario would enable me to earn -50 cents each flip and you would lose -50 cents each flip. One has a positive mathematical expectation in this game. One should feel comfortable wagering money with this positive expectation.

The key issue becomes how much do you wager given a positive mathematical expectation (this issue is

discussed in the money management section). Obviously, mathematical expectation is to be ignored at one's peril.

Example of Mathematical Expectation

1. PP=1/2

P=l

L=l

E(R) =0

2. PP=1/2

P=3

L=l

E(R) =1

3. PP=1/2

P=7

L

=2

E(R)=2.5

4. PP=1/2

P=10

L=3

E(R)=3.5

Read the chart as saying there is a 50% chance of winning 10 and a 50% chance of losing 3. The expected return would be 3.5. This means that for every game you could play where you have these odds you could expect to make 3.5 each and every play on average over the long run. The formula is simple:

[(PP)(P)] - [(PP)(L)]=E(R) P = Profit

L = Loss

PP = Percent Probability E (R) = Expected Rate of Return

There is a 50% chance of winning or losing, but as you can see the winning outcomes vary from 1 to 4. The example shows that it does not matter if you lose 50% of the time as long as you are making more

* Ralph Vince, Portfolio Management Formulas. (New York: John Wiley 7 Sons, 1990).

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when you win. Everybody would opt to play game B than game A if given the choice. The choice among 1, 2, or 3 is a function of how much one has in their account.

Negative games will cause you to go broke. "In a negative expectancy game, there is no money management scheme that will make you a winner. If you continue to bet, regardless of how you manage your money, it is almost certain that you will be a loser, losing your entire stake regardless of how large it was to start. The only smart thing to do is to bet when you have a positive expectancy."2

Remember, a positive expectation does not mean you can over trade, it means you have an edge to be exploited gradually, not all at once. For all of the gamblers in our audience, blackjack is the only casino game where a positive expectation can be gained. All other games are net losers no matter what you do over the long run because the casino has a built-in positive mathematical expectation.

Example #2

Expectancy =(PWxAW) - (PL xAL) PW: Probability of a winning trade AW: Average gain PL: Probability of a losing trade AL: Average loss

Let's use a coin toss as an example to illustrate the point. The rules are as follows: You must bet $5.00 for each coin toss. You have a 50% chance of winning $10.00 (when you guess right, payout is twice your bet). You have a 50% chance of losing $5 (when you guess wrong, you lose your bet).

Expectancy = (0.5 x $10) - (0.5 x $5) = 2.5

In this instance the expectancy of the system is to win $2.50 per toss, on the average. This is positive expectancy. Take a look at roulette if we bet $1:

Expectancy =((1/38) x $35) - ((37/38) x $1) = -0.052

In this instance you would expect to lose, on average, 5.26 cents per roll, if you bet $1.00. This clearly is negative expectancy. It makes no difference if you change the bet sizes, you must have positive expectancy to begin with.

alph Vince, Portfolio Management Formulas. (New York: John Wiley & Sons, 1990).

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TurtleTrader

Main Turtle Rules

"...systematic trading can be compared with a surfer riding on waves...there is no model that explains how combinations of tide, wind and objects [cause] waves to develop... [systematic trading] is not con -cemed with predictions where the next wave will be, or forecasting its magnitude. Systematic trading merely reacts to (price) waves, as and when they become discernible. The circumstances are dynamic and therefore currents are

changing continually. New factors may cause waves to unfold or change direction; new waves may come from directions they never came from before. However, as long as the typical characteristics of past waves remain generally compatible with the characteristics of future waves, suffers can continue to benefit from riding on waves, as they have been doing before."

- MortonBaratz

"Are price moves random? Is there any basis for trends? What makes prices move? The "aha! process lies at the heart of price change . For instance, consider the series: OTTFFSSE. What is the next letter? This puzzle creates tension — until you see the first letters of the ordinal numbers — one, two. "Aha! "you say. A lot happens during an "aha." The puzzle dies and the tension dissipates. A societal "aha! " drives price. Read the newspapers and the news magazines during a major move. At first, no one gets why the move is happening. There's a lot of confusion. Part of the move's way up, some people get it. At the end, everybody gets it. The tension is resolved and the move ends. "

- Ed Seykota "Technical Analysis Magazine"

Philosophical Tenets of Turtle Philosophy

* Turtles were taught to not risk more than 2% of equity on any one trade. * Turtles have limits on total risk for a sector and for the portfolio as a whole. * Position size is determined by a formula based on total capital on hand.

* Turtles know every day how many contracts should be based on the dollar value of the account.

* As they begin to make money increase position size slower than when they decrease in times of losing money. * Turtles are willing to be aggressive with new profits. For example, if a Turtle trader has a 40% gain in wheat

and the stop is still at the 2% designated risk level, it remains a possibility that the market could retrace all the way back to the original stop level.

* Turtles do not have price or gain objectives. They let the market tell them what the opportunity will be. * Almost all of their money is made on less than 10% of their trades.

* Turtles are disciplined and consistent. They do the hard thing and stick with their strategy through thick and thin.

Points to Remember

You must be willing to risk profits made. If you are not willing or able to risk profits made, perhaps the Fidelity Magellan Fund should be your course of direction. Big money is made on huge moves. Silver going from $5-$8 is sure profit, but you can not afford to miss the major move of $10-$50. This is the key to trading like a Turtle. You have to not miss the big moves. The big moves are the Turtles' bread and butter. The nature of long term trading is such that when you are on a losing streak, positive expectation of winning is right around the comer. Consequently, when one is on a hot streak losses are not that far behind. Cycles exist. The rules are important, but understanding the concepts behind the rules is the absolute key to success.

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TurtleTrader Many are adverse to trading long term strategies. Some might say I don't want a "large loss" thinking a long term strategy involves only large loss. But they forget profit and loss are proportional. A short term system will never allow you to be into the trend long enough to achieve large profits. You end up with small losses and small profits. Numerous small losses added together equal big losses.

When you trade for the big picture you have more on your side in terms of the move. The larger the move, the larger the validation of the move. If you were trading some short term pattern predictive system you would never be able to participate fully in the large trending of a market.

The biggest indicator of the success of the Turtle method is all the trend followers so highly correlated outlined at the TurtleTrader site. The numbers don't lie.

Ask yourself these questions:

1. How much capital do I need to start trading? Too many traders come to the markets undercapitalized. Trading is a business; it is a well-known fact that most small businesses fail from a lack of capital. The same can be said for trading failure.

2. How much of my capital should I risk in any one trade?

3. How much capital should I allocate for all my positions at any one time? 4. How do I increase the number of traded contracts as my capital increases?

Computers

/

Technology

Computers make the trading easier, but they are not imperative. In fact, closing prices from a financial paper can be used every evening to determine contingencies for the next day. A broker can be instructed to follow your orders and that quickly you are in the game with a sound, proven approach to making serious money.

As you go through the rules and begin trading do not lose sight of the fact that having a screen in one's face 24 hours a day does not assure one of winnings. In fact, many long term trend followers do not have any employees watching the screen during the day, but wait to hear an alarm go off indicating a buy or sell level has been reached.

Make sure you reread "A Day in the Life" about Dunn Capital at: http://www.turtletrader.com/aavinthelife.html

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TurtleTrader

Volatility Introduction

Average True Range

Volatility is market movement. One way to define volatility is through the concept of a range. The larger the range is in a market, the greater the volatility. "Range can be defined as the distance the price moves per increment of time."3

"A snapshot of daily ranges with open, high, low, and closes."

Examine the daily bar movements to gain a feel for the concept of range. In order to implement the range concept the true range (TR) must first be determined. "...[T]he TR is defined as the greatest of the following:

The distance from today's high to today's low

The distance from yesterday's close to today's high, or The distance from yesterday's close to today's low" 4

Wilder did not invent the concept of volatility measurement. But, he did first publish material on ATR. In fact, the real genius behind this book is a little known programmer named GreshamNorthcott that Welles paid $50,000 for the formulas.

Welles Wilder, New concepts in Technical Trading Systems. 1978. Welles Wilder. New concepts in Technical Trading Systems. 1978.

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TurtleTrader

Date Open High Low Close TR ATR

i 52.80 53.00 52.50 52.70 .50 2 52.60 52.75 52.25 52.55 .50 3 52.00 52.35 51.85 52.30 .70 4 52.20 52.45 52.15 52.40 .30 4.05/7=.58 5 52.10 52.35 51.75 51.90 .65 6 51.90 52.10 51.50 51.65 .60 7 51.50 51.80 51.00 51.10 .80 .58 8 51.15 51.60 51.25 51.55 .50 .57 9 51.50 51.70 51.40 51.65 .30 .53 10 51.60 51.60 51.10 51.15 .55 .53 11 51.00 51.40 50.75 50.75 .65 .55 12 51.35 51.75 51.35 51.65 1.00 .61

Turtles Take the

TR

Concept One Step Further

An "average true range (ATR)" of the prior 15 TRs is determined. It is an exponential moving average weighted such that the ATR =[(l/15)(today's TR) + (14/15)(prior ATR)]. The ATR can be determined on 15 or 7 days. It can be updated weekly or monthly.

A moving average is a method of calculating the average value of a security's price, or indicator, over a period of time. The term "moving" implies, and rightly so, that the average changes or moves. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes over time, its average price moves up or down.

The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Once this "weighting" scheme has been determined, it is held static over the range of calculations. The exceptions are the variable moving average and volume adjusted moving average. The variable moving average automatically adjusts its weighting based on market conditions. A variable moving average becomes more sensitive to recent data as volatility increases and less sensitive to recent data as volatility decreases. Similarly, the volume adjusted moving average automatically adjusts as the security's volume increases and decreases.

For example, to calculate a 21-day moving average of XYZ security: First, we would add up XYZ's closing prices for the preceding 21 days. Next, we would divide that sum by 21; this would give us the average price of XYZ over the preceding 21 days. We would plot this average price on a chart. The following day (tomorrow) we would do the same calculations: add up the previous 21 days' closing prices, divide by 21, and plot the resulting figure on the chart.

For example, to calculate a 9% exponential moving average of XYZ security: First, we would take today's closing price and multiply it by 9%. We would then add this product to the value of yesterday's moving average multiplied by 91% (100% - 9% = 91%).

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TurtleTrader m.a.=[(today's close) x 0.09] +[(yesterday's m.a.)x 0.91]

The method used to calculate an exponential moving average puts more weight toward recent data and less weight toward past data than does the simple moving average method. This method is often called exponentially weighted.

ATR (Average True Range)

ATR is the basic measuring block. It allows you to balance positions across markets in terms of risk and dollar management. ATR has many functions to be discussed in the manual.

- How many contracts will make up each unit. - Establish stops

- Determine when to add additional contracts.

Determining units and risk is discussed next. The following 2 links will be helpful: Tick Sizes can be found at:

http://www.turtletrader.com/contract.html Contract details can be found at: http://www.turtletrader.com/contract.html

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TurtleTrader

Risk Determination and Units

Many trend followers use differing levels of risk. Some risk 1%, some might risk 5% per trade. This is something you will need to decide on. Email support if difficulties persist.

Example #1:1 have $100,000 acct. and risk 1% = $1000, and 2ATR = $200, I'd trade 5 contracts. That 1% and 5 contracts is one unit.

Example #2: I have $100,000 acct. and risk 2% = $2000 and 2ATR = $200, I'd trade 10 contracts. That 2% and 10 contracts is one unit.

Case in point: Chesapeake is a low risk Turtle (1-2%) and Hawksbill (2-6%) is higher risk. Example #3: (All figures are examples only)

Money under management is $1,000,000. Risk per trade is 1% or $10,000.

Protective stop is 2 ATR.

Current 1 ATR volatility of the market is $270.

Current market volatility is determined by first looking up the tick $ amount (see previous page). For example, if the ATR of the Canadian dollar is 27 ticks and each tick is worth $10, a 1 ATR move would be $270 a contract. A 2 ATR risk for this trade is $270 x 2 contracts = $540. $10,000 / $540 = 18. Purchase 18 contracts for this trade. If the trade goes against you then each one of the 18 contracts would lose $540 for a total of $10,000 or 1% of $1,000,000.

Example #4 (Introduction Of Units): (All figures are examples only) Take the Canadian dollar with an ATR of 27 ticks. Each tick is worth $10. Therefore, a 1 ATR move either up or down is worth $270 per contract. Assume a $100,000 account.

1% of $100,000 is $1000. This is considered 1 unit. Go back to #2 and remember a 1 ATR move is $270.

Take 1 unit or $1000 & 1 ATR move = $270. $1000 / $270=3.7 contracts. Round down 3.7 to 3 contracts.

Trading on a 1 unit basis would require 3 contracts of Canadian dollars to be purchased or sold assuming signal to buy/sell is initiated.

Example #5: (All figures are examples only)

1,000,000 account, 2% risk, 2ATR stop, current 1ATR is $500. Therefore, $20,000 would be 1 unit. A 2ATR stop would be $1000. $20,000/$1000 would mean 20 contracts bought/sold based on 1 unit being traded, or 40 contracts bought/sold based on 2 units being traded. For a smaller account the rules are the same, you would just play in smaller increments. The methods adjust to account size dynamically.

Example #6: (All figures are examples only)

Assume $25,000 account. 1% risk is $250. The ATR of Soy Beans is 10 cents. A 1 ATR move would be $500. $250/$500 = 1/2 contract. Since you can't trade a 1/2 contract you will buy 1 contract and view as 2 unit position.

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TurtleTrader

Example #7: (All figures are examples only) Think about it this way-Example:

1. Account $100,000.

2. You elect to risk 1.5%. ($1500)

3. 3 ATR stop (daily volatility is $5 so you have $15 stop). Answer:

You buy 100 shares. You have 3 ATR stop and are risking 1.5% of equity.

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TurtleTrader

Volatility Summary

The Turtle ability to adapt to different markets and different market conditions is based on keeping everything proportional to market volatility (i.e. ATR concept).

One of the main reasons for volatility controls is related to the psychological side of trading. Volatile trading periods can cause uneasiness, but if you have built into your trading methods (like the rules described in this manual) you can remain realistic about your trading and adjust to situations automatically due to a precise plan known in advance.

Units

Understand the units concept. When we take our money on hand and determine units per account we force ourselves to adjust unit size depending on how much money one has in their account. Think units, not $ on hand. This is what separates pros from amateurs.

Trading in unit terms brings everything down to the least common denominator. For example, if you had a small account and large account (with the large account being exactly double the small account) and the small was to trade 2 contracts, then the large account would trade 4 contracts. This allows you to keep trading the same way you have always traded even as your equity increases.

If you have a $100,000 account and you're going to risk 5% per trade, you'd have $5,000 to lose. If your examination of the charts shows that the price movement you're willing to risk equals $1,000 per contract, then you can trade five contracts. If you want to risk 10%, then do 10 contracts.

People start out trading one-lots and as they get better they'll move up to 10 contracts. As time progresses, they reach a certain comfort level and maybe they never graduate through 100 contracts or 1,000 contracts. You don't want that to happen. You want to try to keep things in constant leverage so that you're still trading the same way that you were when you started. This method of calculating the number of contracts to trade is convenient because it allows you to keep trading the same way you've always traded, as your equity increases.

Working in unit terms condenses everything down to the least common denominator. For example, say you're managing two accounts. One is $250,000 and the other is $500,000. The unit concept applies when this $250,000 account trades exactly 50% of the $500,000 account.

If the $250,000 account needs five contracts, then the $500,000 account needs 10 contracts. In other words, define the unit for the smaller account at five contracts and define the unit for the larger account at 10 contracts. If the position calls for two units, you'd do 10 contracts for the smaller account and 20 for the larger account. The Turtle ability to adapt to different markets and different market conditions is based on keeping things proportional to the market's volatility.

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TurtleTrader

Maximum Units

5 units per market max. 10 units per all markets is absolute maximum. Note: 1 long unit and 1 short unit would be viewed as 1 unit. The nature of a having short and a long position lowers the risk profile of both positions. Turtles limit their portfolios to 10 total units or 20 units if longs are balances against shorts. Stated another way, 10 dependent units is equal to 5 independent units. Also see long/short balance rule.

Example of Practical Money Management Application

Let us assume an account starts with $100,000. $100,000 is considered the original equity for the account (100%). The maximum risk per unit is $2000 (2%). One (1) unit is the number of contracts in a market which will be equivalent to $1000 in equity change given a 1 ATR price movement. For example, if 1 ATR = $200 in equity change per contract, 1 unit is equivalent to 5 contracts. Turtles limit their portfolios to 10 total units or 20 units if longs are balances against shorts. Stated another way, 10 dependent units is equal to 5 independent units. Pyramiding is a critical element of the original teachings. Turtles aim to pyramid early on in a trend for if the pyramiding takes place further into a trend the losses can be large when there is a reversal. One does not want a trade that reaches 20 ATR and have the average price at entry be 12 ATR, that's asking for serious trouble and loss. The Turtles were taught to strive to place all units on between 4 ATR and 6 ATR. After 6 ATR research dictates danger is ahead if pyramiding is continued.

Risk of Ruin

"Risk of ruin...is the chance of losing so much that you must stop trading. [One must]... specify the maximum amount that they are willing to lose, constituting ruin. In real trading, once profits accumulate, the

chance of ruin decreases. The greatest risk is at the beginning."5

Understanding risk of ruin is crucial to Turtle style success. It is a mechanical, statistical method of looking at probabilities rather than a particular trading approach. Turtles use risk of ruin concepts to adjust their unit size based on fluctuations in the account. The key aspect of account adjustment occurs when a Turtle trader is losing money. There is a rigid scenario whereby the units traded are decreased a certain percentage based on the

percentage reduction in the account. Intuitively, it should make sense that one reduces their trading size when one is losing money. Don't recollect old casino tales of "doubling up" in a losing streak. This is not gambling.

Risk of ruin is not a fun subject. No one wants to think about losing large amounts of their capital. There is a caveat to trading commodities however. Commodity markets typically offer exponential moves on the upside and linear moves down. This offers tremendous opportunity to recoup quickly the money that was lost. Long term trend followers usually recoup losses quite quickly. The exponential moves of commodities are the prime reason for successfully recovering losses. Eventually, you will develop the habit of trading larger after a loss and smaller after a win.

3_{Perry Kaufman, Smarter Trading: Improving Performance in Changing Markets. (New York: McGraw-Hill, Inc., 1995), p.}

66-67.

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TurtleTrader

As you gain in account size you will need to think of "False Ruin." For example, when you get to 200% think of 130% as ruin like when you were at 100% and 50% was considered ruin. Ruin will need to be adjusted

accordingly to bankroll just like all other concepts within the Turtle system are adjusted to current bankroll. The following chart shows the % chances of blowing out when you are losing money given a reduction in trading size and given no reduction in trading size. For example, if equity drops 25% and if you have a 1 ATR expectation and do not reduce trading size there is a 20% chance of blowing out. However, if you reduce trading size there is a 14% chance of blowing out.

There is nothing wrong with reducing units size faster than the original Turtle program. A risk averse trader may elect to reduce trading size by 10% with every 5% reduction in their account. Experiment with various

approaches. Determine what fits your style. This is one of the few choices that differs widely among Turtles. The Turtle Chesapeake is far more risk averse than the Turtles EMC and Hawksbill. You might be saying, "I thought this stuff was all automatic, no discretion?". Yes, it is automatic, but first you must decide what rules you will follow on an automated basis. One of the decisions you will have to make involves trading size and risk of ruin.

Chesapeake has had lower drawdowns, but lower returns. Hawksbill and EMC on the other hand have much greater returns than Chesapeake, but their drawdowns are much greater. The differences among these advisors is a result of variable unit sizes. Some traders may elect to trade 1/2 units as opposed to full units. Trading 1/2 units and using the Midam Exchange are a key options for new traders.

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TurtleTrader

Unit Reduction Rules

Main Rule: each time you lose 10 ATR or 10% you will cut your unit trading size by 20%.

The following chart illustrates the consequences of reduction in trading size v. no reduction in trading size. The numbers are difficult to ignore. When you encounter a period of losing you must reduce your trading size.

Equity Reduction

10% DrawnD 20% DrawnD 25% DrawnD 30%DrawnD 40%DrawnD 50%DrawnD Lower Trading Size 70% 45% 35% 26% 13% 6% 1/2 ATR Expectation Lower Trading Size 53% 24% 14% 9% 2.5% 0.5% 1ATR Expectation Constant Trading Size 70% 50% 2% 35% 25% 17% 1/2 ATR Expectation Constant Trading Size 53% 27% 20% 15% 8% 4% 1 ATR Expectation

Notice that the greater the mathematical expectation of trading success, the better the numbers work in your favor. This holds true for increases and decreases in your account. There is a 42% chance your account will suffer a 25% drawdown if your trading style generates a 1/2 ATR mathematical expectation utilizing a constant trading size.

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TurtleTrader

Money Management

Money management involves the proper use of protective stops, profit targets and allocation of capital, in addition to having adequate capital to survive drawdowns. Risks you take should be based on the current volatility of the market. The idea is that Turtles let the market show them a predefined percentage of new equity before they can add on more units. Recall the section on units.

Some General Thoughts

* Your total profits in all other positions does not bear relevance to individual market decisions.

* Trade when the volatility shrinks. For example, when the volatility shrinks by 50%, it allows more contracts to be purchased for the same dollar risk.

* 90% of trends typically end after 10 ATR. This is not a rule, but an observation.

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