In the trading hall of fame, Richard Dennis may not ring a bell like Paul Tudor Jones or George Soros. But he is a legend in his own right.
Dennis' uncanny ability to make money quickly earned him the moniker "Prince of the Pit." In 1986, he'd made $80 million, cementing his legendary status alongside Soros, who made $100 million, and "junk bond king" Michael Milken, who also raked in $80 million that year.
Growing up on the South Side of Chicago, Dennis did not have a privileged childhood or wealthy parents. In fact, his father, who worked for the city of Chicago for 30 years, once had a job shoveling coal. The self-taught trader had to borrow $1,600 from his family to get started, but he eventually turned that into a $200 million fortune in the early '80s.
What was unique about Dennis was not just his extraordinary trading career but also his belief that trading could be taught. But his partner William Eckhardt believed that successful traders have a natural gift and are wired differently.
In 1983 and '84, in order to settle their decade-long nature-versus-nurture debate, Dennis put out ads in The Wall Street Journal and other financial news outlets looking for trainees who would not only get to trade his money but also learn his proprietary trading strategies. To avid job seekers, the opportunity seemed too good to be true, especially because it said prior trading experience was not necessary.
Picking turtle traders from thousands of applicants
Dennis and Eckhardt's intellectual experiment has often reminded people of the 1983 movie "Trading Places."
Indeed, while there is no street hustler among their recruits, many of the "turtle traders" — inspired by the turtle-breeding farm Dennis visited in Singapore — come from nontraditional backgrounds. Jim Melnick was a security guard for the Chicago Board of Trade, Mike Shannon was an actor turned commodity broker, Jiri "George" Svoboda was a master blackjack player, and Mike Carr was a game designer at Dungeons & Dragons.
"We are going to grow traders just like they grow turtles in Singapore," Dennis once said.
In the end, he not only won the bet but also made millionaires out of his apprentices. For example, by 1993, his protégé Jerry Parker, a former accountant, ranked 25th on the list of 100 top-paid Wall Street players, pulling in $35 million that year.
Trading rules and philosophies
Before the turtle traders could trade their way to millions, they had to complete a two-week training program, during which they learned the secret to Dennis' success — trend following.
"In a nutshell, that meant that they needed a 'trend' to make money," Covel writes. "Trend followers always wait for a market to move; then they follow it. Capturing the majority of a trend, up or down, for profit is the goal."
It is the kind of trading strategy that "would have made investors like Warren Buffett cringe," he adds. There would be no fundamental analysis, buying low and selling high, or acting on news and economic reports.
But the traders had to be able to answer five questions at all times: (1) What is the state of the market? (2) What is the volatility of the market? (3) What is the equity being traded? (4) What is the system or the trading orientation? (5) What is the risk aversion of the trader or client?
Once they have the answers in mind, they had to follow Dennis' rules with discipline.
1. How to handle profits properly is a separation point between winners and losers. Great traders adjust their trading to the money they have at any one time.
Human nature drives traders to think of the money they earn based on their original capital as lucky money that they can take bigger risks with. Dennis says that if a trader starts with $100,000 and grows it into $200,000, they must use the additional $100,000 with "the same concern, care, and discipline."
2. Traders who face the same opportunity must trade the same. Personal feelings can't interfere.
Many traders with a big profit run-up are anxious to take their profits off the table to feel secure. Dennis designed this rule so that they don't act irrationally or break a rule.
3. If the turtles lost money in a market, they had to move on. Accepting and managing losses are part of their game.
Traders tend to fixate on where the market hurt them in hopes of making the money back in the same place. Dennis wanted his turtle traders to "be agnostic and accept whatever trending market created opportunity."
4. The turtles were taught not to fixate on when they entered a market. They were instructed to worry about when they will exit.
Dennis views traders who are averse to losses as being in the wrong business. Instead, he thinks managing the losing positions allows them to wait for the big trends, which is why the entry price is not paramount.
5. Don't try to predict how long a trend either up or down will last. It is impossible.
Dennis believes that no one has objective knowledge of how long a trend lasts and that traders should not let personal or emotional factors influence their trading.
6. Measuring volatility was critical for the turtles. Most people then and today ignore it in their trading.
Knowing at all times the market's volatility, rather than the price of a stock or futures contract, is more important because it allows traders to buy or sell short based on their capital.
