The evolution of turtle

The evolution of turtle

You know, it's true what they say. "The more things change the more they stay the same! It's only three years, from January 2003, I wrote my now classic "I was Wrong" article, recognizing that trend following is not dead after all. In the past few years, we saw some good trending markets and some nice returns, the host turtle model to between 50% and 100% for 2003 and 2004, respectively. And while the current final year results are not quite yet, although 2005 got off to a pretty rough start, looks like a late rally in many of the markets are going to wind up giving us another profitable year.

But the truth of the matter is, if you look very carefully as they are, and in particular Turtle system, and other trend following systems in general, there are some things that have changed little. Examination of the 'rolling' five or ten years time will show some minor worse statistics than the 'formal' method the occurrence of trading back in the early 1980s. Total returns are somewhat lower, the withdrawal a little deeper, and recovery periods are a bit more.

There are several reasons for this, most of which can be summarized under the broad umbrella of natural progression. On the one hand, we have good old fashioned Darwinian "survival of the fittest model.
Hey, trading is basically one big zero sum game, where someone must win and someone has to lose. Winners are smarter fighters losers will tap out and fall out of the way (or even to become "agents"). As with any competition, this means that we finally have winners compete against other winners, thus raising the bar for all levels of competition, and making the whole damn game harder to start. At least it's a philosophical argument about what is happening.

The technical argument is much more cut and dried, but it's basically the same story. In the 'old' days, which was first and fastest to figure things out, and they were still changing there was a huge advantage. But then along came the crutch of human thought, the computer. By the early 1990s all had one sitting on his desk, and the playing field had been largely leveled. Information is still flowing, but now it flowed faster and faster each became aware of it. Which means that all traders from outside were now able to quickly adjust their positions and come back in line with what new information suddenly became available.

I have spoken at great lengths about how and why trend following works, and the underlying reasons that come about trends in the first place. Simply put, when something happens or the supply or demand of goods (or park), the fair market value balance shifts, and the price moves to a new level. In the old days, sometimes it took a while for the market mechanism to find this new level, but nowadays, thanks to more powerful computer speed and performance, everything is all happening very quickly.

The end result as far as we are concerned is two fold. First, the trends that occur more explosive out of the box, which means that the trader must be quicker and more nimble, and jumping on board, and holding. Secondly, and importantly, is the fact that these trends do not work as before, or last as long as it used to, before all players have a chance to adjust their positions, and the market (any market) comes back into balance.

To put it in terms turtle, good freeze or heat wave or an embargo be used to cause the market as coffee or soybeans or crude oil to run for months, and gave us 40 N may move before it's over. I remember a hot dry summer in 1988, when he was 40 N Beans. I also remember that crude oil during the first Gulf War in 1991 ran for only about 40 N profit. Hell, there was still a nice run in the 40 N stock indexes during the dot.com bubble of the mid-1990s. But in the last five years or so, I am hard pressed to think of every market there are so many great trend.

Back in the 1980s, they were kind of moves we got excited about, and get one or two of them almost every year. 20 N moves were fairly common place, and 10 N was nothing much to get excited about. But since the turn of the century, I think around 20-25 N largest I can recall seeing. I think Feeder cattle last year in 23 N was the major trend of the year, and another problem is that not too many people even follow that (relatively) small market.

But remember, we still need these few large domestic trades each year to pay for all the small losses and whipsaws and slippage and other costs of doing trade on a daily basis. The main problem during the 'difficult' periods is not that we do not get any trends, but that the trends we are not large enough or long enough to pay for all the other stuff. We are still trading in distribution that have more losing trades than winning ones, so at least some of the few winners we hit another should be large enough to cover all losses.

The question we face as a constantly evolving traders becomes, what, if anything, we need to do for this kind of stuff. In the past, I've been a proponent of school of thought that says, "if it is not broke do not fix it". Certainly, turtles, or any other trend followers, and not getting easily triple digit returns from two decades ago. But hey, we are still doing better than anyone else around, and I for one do not see much reason to complain, even to get upset about it.

But my opinion has changed in the past few years. I am no longer holding out for 40 N outliers, because they simply do not come around that often anymore. I have not gotten to the point where if I see a trend approaching 20 N profits begin to put one foot out the door, and looking around for warning signs to take me to duck quickly. Those are the warning signs come in the form of some other types of indicators have learned to pay attention. But keep in mind that all this is merely a math and probability decision not one of fear or emotion or just "want" to take profits.

Without getting into too much detail, lets say that at some point may still be obvious that if there is a reasonable minimum the possibility of catching a big move, you should try to hold out for that. On the other hand, if the chances are lower than the big move happening, then at some point, it needs to become better to take the smaller but surer profit. While chances are not always so tangible, and it is as much art as science, let's say I have been getting better at it with more experience over the years.

The bottom line is that where I used to hold out as long as possible, often after the trend has changed me, now I'm quickly off first and ask questions later. And to make sure I left some money on the table when the trend kept going and I had gotten ahead. But I also saved a lot more recognition when the party was over and out before anyone else ran for the door. And the funny thing is that one of my thoughts that brokers have become better trader because he has always been an advocate of locking up a profit and putting money in your pocket. But it's not the reason I do what I do, my criteria are technical and emotional in nature.

Of course, Richard Dennis was always an advocate for the use of discretion to override mechanical technical criteria, the trick is getting good at knowing how and when to do it. And I think this is something that can not be taught, even by me, but only comes with experience. Now I can look at half a dozen different things, including stochastics, market profile, mood indicators, and even news reports, and all somehow assimilate into my mind and decide when it feels right "to make a discretionary move .

Last year at Thanksgiving, that there were some trends Currency right near the top of the market. And this year, will come out the right energies after Hurricane Katrina, two days from the top. As I have gotten better than this, I was also able to strengthen the courage of my convictions to stick to my guns and not second guess yourself. In the past when I would get out of the trade too early and keep on going, I thought I made a mistake and then tried to jump back in, reportedly at a worse price than when you came out. Now that I'm out, I have patience and discipline to stay out and fight the temptation to jump back in and whip himself around.

It seems that when I'm wrong, I'm fine with a little, because even if the move continues, it does not go too far before the end outside Peters and turns. I left the yen last week and left about 1 N in the table so far. And I just got out of some gold the other night, and right now it is sharply higher again (also by about 1 N). But when I'm right, as in Unleaded gas last August, I was able to save yourself close to 10 N before the market reversed enough computer model to finally give a signal winding. So it seems like a pretty fair tradeoff for me. And it's also a big reason that my personal trading account exceeded the turtle computer model so far in 2005.


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