August 17, 2011

Richard Dennis - Turtle Trader

Beginning
Richard Dennis grew up in Chicago in the 1950s. The first stock he bought was while attending St. Laurence Prep School, but the company soon folded for bankruptcy. In the late 1960s, Richard Dennis worked as a runner at the Chicago Mercantile Exchange. At the Exchange, he became interested in commodity trading, but he wasn't very good at it. He made $40 a week and lost $40 an hour due to trading losses. What he didn't lose was experience.
    While at DePaul University, he studied philosophy, but failed the accounting class. He graduated and received a fellowship to Tulane University in 1970. The same year, he borrowed $1200 from his family to buy as seat on the Mid American Exchange in Chicago. While in school, Richard Dennis used a phone to make trades in Chicago. Trading with a phone didn't work, so he dropped out of school after a week and moved back to Chicago.

On his own
Richard Dennis began trading with $400. By 1973, the money had grown to $100,000. At age 25, Richard Dennis was a millionaire. Thanks to the profits, he could move to the more expensive Chicago Board of Trade (CBOT) - the world's largest future exchange. Each future market had its own trading pit were the actual trading took place. Richard Dennis traded many markets and had to run around between the different pits. Today, the trading pits have been replaced with computers.
    In 1975, he founded the partnership C&D commodities. He moved into an office together with his partner Larry Carroll. At it's peak, C&D Commodities had 100 employees and 100 customers. C&D Commodities traded other peoples money who had invested in the company. "It's drastically more work to lose other people's money," he said. "It's tough. I go home and worry about it."
    In 1983, Richard Dennis hired 23 trainees to help him trade some of his money. The trainees were successful, also after they left C&D Commodities. These trainees were called the Turtles. "Trading was more teachable than I ever imagined," he said. "Even though I was the only one who thought it was teachable... it was teachable beyond my wildest imagination." The trading system Richard Dennis and William Eckhardt taught to the Turtles is today available for free here: The Original Turtle Trading Rules.
    Because of trading losses, some of Richard Dennis's clients closed their accounts in 1984. A part of the strategy Richard Dennis used was to aim for the big profits so the risk was high. Most clients couldn't handle this high volatility strategy and withdrew their money.
    In 1988, Dennis declared that he was retiring and devoted his life to political causes. Each $1000 invested in the beginning would have been worth $3833 when the accounts closed - approximately a 25 percent annual return. But Richard Dennis came back in 1994 and created the Dennis Trading Group together with his brother Tom. In 2000, he retired for the second time.

Strategy
One big part of the secret behind the successful trading of Richard Dennis was that he understood his own psychology. In the beginning Richard Dennis made the classical mistakes: due to the high risk, he often panicked and sold at the bottom.
    Most traders wake up early in the morning to read different new such as government reports or crop reports. Richard Dennis, on the other hand, stayed in bed as long as possible, until the last minute before the trading started. The only magazine he read was Psychology Today.
    On the trading floor, Richard Dennis could trade from the feeling around him – he could see how the people around him acted. Some people are never right at market turns, and one can trade against these people being wrong almost risk-free.
    Part of the strategy was to use a lot of leverage. "95 percent of my profits have come from only 5 percent of my trades," he said. Richard Dennis always believed in his ability to rebound trading losses if he followed his trading strategy. He never tried to catch up losses fast. It's important to preserve the capital for those few instances when you can make a lot of money in a very short period of time. You can't afford to throw away the capital on not optimal trades.
    While trading, Richard Dennis wrote down what he did right and what he did wrong. It's important to learn from the bad trades. Losing money is part of the Trading University.
    Even if he wanted to, Richard Dennis thinks there's no point to publish his trading strategy. "I always say that you could publish trading rules in the newspaper and no one would follow them," he said. "The key is consistency and discipline. Almost anybody can make up a list of rules that can beat the market. What they couldn't do is give them the confidence to stick to those rules even when things are going bad." But we have some clues about the trading strategy Richard Dennis used:
  • Use stops and cut losses. But it's not wise to have the stops where everyone else has their stops. Sell a losing trade after a week or two since you are clearly wrong on that position. Also sell a break-even trade after a couple of weeks since you are probably wrong on that position.
  • Don't be too tied to history. Always expect the unexpected. The stock market can fall with 22 percent in one day like it did in 1987.
  • Wait for a trend before you get in a trade. It's not important what you use to define the trend. Being consistent and always buy long when the trend is up is, and always sell short when the trend is down, is more important. "If a market goes up when it should go up, I might buy early in the trend," he said. "If it goes down when it should go up, I'll wait until the trend is better defined."
  • Don't have a long-term view. One might miss an important short-term buy or sell signal.
  • Use a trading strategy that works with different assets. "If a system doesn't work for both bonds and beans, we don't care about it," he said. Using a mechanical system that relies on signals from a computer is currently the easiest and best way to trade according to Dennis. He used a system that evaluate price, volume, and other market data to determine entry and exit positions for short- and long-term trades. "When I started in this business there were no computer, and it was hard to do research to determine what made the market tick," he said.

Conclusions
  • It's possible to teach trading to other people. The Turtles is one example. Julian Robertson and the Tiger Cubs is another example.
  • One can learn trading without having the Wall Street connections. Richard Dennis is a self-taught trader, but recommends the book Reminiscences of a Stock Operator if you want to learn how to trade. Attending the Trading University (lose money in the markets and learn form the mistakes) is expensive. One should keep a diary to remember each mistake.
  • Psychology is important. Richard Dennis used to read the magazine Psychology Today, while ignoring the latest hit news.
  • It's important to preserve the capital one has for those few instances when you can make a lot of money in a very short period of time. You can't afford is to throw away the capital on not optimal trades.

Sources:

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