Hello, welcome to Investor’s Bookshelf. Today, the book I’ll be interpreting for you is Way of the Turtle. In about 25 minutes, I’ll introduce you to a trading rule—the Turtle Trading Rules—and how they are applied in market trading.
This book is called Way of the Turtle, and it refers to the turtle that swims in the sea. You may be wondering, why such a name? The story of this book actually comes from a bet made over 30 years ago between two trading masters: Richard Dennis and William Eckhardt. These two men were legendary figures in the U.S. futures markets of the 1980s. Dennis and Eckhardt were partners, and during their active years, they earned over 50 million dollars in profits from the market every year on average—an extraordinary achievement at that time.
Although they were partners, they disagreed on one point: whether excellent traders could be trained. Dennis believed that great traders could be developed, as long as they were taught the right trading techniques. Eckhardt disagreed—he thought that excellent traders were born, and that those without natural talent would still fail in trading, even if they were taught the techniques, because of psychological and other limitations. Neither of them was willing to yield, and they often debated this question.
One day, while visiting a turtle farm in Singapore, they started arguing again. The debate grew more heated, and Dennis, staring at the turtles in the farm, suddenly said to Eckhardt: “I’m going to train traders just like Singaporeans raise turtles. Let’s make a bet and see who is right.”
After returning home, Dennis placed ads in major newspapers to recruit trainees. After several rounds of selection, he chose 13 students and called them “Turtles.” The trading method Dennis taught them came to be known as the “Turtle Trading Rules,” which is also where the book’s title comes from.
Back to the story of Dennis training traders—he gave each Turtle a trading account with one million dollars, taught them his trading methods, and made them promise not to reveal the trading rules to the outside world for 10 years. This book was written after that 10-year agreement had expired. So, did the Turtle Trading Rules actually work? The data shows that in the four years after learning the rules, the students achieved an average annual compound return of 80%, earning more than 100 million dollars in profits altogether. This result was truly astonishing. From this outcome, we can also see that in the bet between Dennis and Eckhardt, Dennis ultimately won.
The author of this book, Curtis Faith, was one of those 13 Turtles. He joined the Turtle program at the age of 19 and earned over 31 million dollars for Richard Dennis, making him a legend among the Turtle traders. In this book, the author fully reveals both the Turtle Trading Rules he learned and his reflections on trading systems. If you are interested in market trading, whether in stocks or futures, the ideas in this book are well worth exploring.
Now that we’ve understood the background of the book and its author, I will explain its content in detail in two parts. The first part is about the specific content of the Turtle Trading Rules. We’ve all heard that to make money in trading, one needs to “buy low and sell high”—but how can you actually do that? In this section, I’ll introduce the author’s method.
In the second part, we’ll discuss why trading methods that worked extremely well in history may not necessarily work in the future. This section introduces a theory completely different from the Turtle Trading Rules, and from the clash of these ideas, you’ll gain a deeper understanding of market trading.
Part One
Entering the first part: what exactly does the Turtle Trading Rule say? Before we get into this topic, we must first understand what a trader is. Traders and investors are two completely different kinds of people. Although both are active in the markets, there is a fundamental difference between them, yet people often confuse the two. The content of Way of the Turtle is more specifically aimed at traders, so we need to clarify what a trader is before we can understand the scope of the Turtle Trading Rules.
There is a big difference between investors and traders. Investors buy stocks with long-term goals in mind. They believe that certain things or companies will appreciate in value over a considerable period of time. For example, the ones we often hear about—Warren Buffett and Charlie Munger—are investors. On the surface, they buy company stocks, but in fact, they are buying something real: the enterprise represented by the stock, which includes the management team, products, and market position. Traders, on the other hand, do not buy tangible things. They don’t buy oil, coffee, or gold directly. Traders buy stocks, futures contracts, or options. They do not care about a company’s management team or global coffee production. Traders care only about price. In essence, what they buy and sell is risk.
And since traders buy and sell risk, there must be those who need to offload risk. These people are called “hedgers.” So, with all this talk of buying and selling risk and hedging, how should we understand it? It’s actually quite simple—let me give you an example.
The book gives an example of an airline company. Airlines are highly sensitive to the price of jet fuel, which is closely tied to the price of oil. When oil prices rise, the airline’s costs increase and profits decrease, unless it raises ticket prices. But raising ticket prices harms consumer interests and creates dissatisfaction. So in this case, the airline is a hedger—it needs to transfer the risk of rising oil prices. To whom? To traders. As we said, traders are those who buy and sell risk. And how do they transfer it?
Here comes another concept: “futures contracts.” The way the airline transfers risk is by buying futures contracts in the oil market to hedge against risk. This is easy to understand. Suppose oil is currently $25 a barrel. An airline buys a five-year contract for oil at $25 a barrel. That means for the next five years, regardless of whether oil prices rise or fall, the airline can still buy oil at $25 a barrel. By doing this, the airline avoids the risk of rising oil prices in the future. Of course, if oil prices fall, it must bear that loss. These futures contracts—the risks of oil price fluctuations—are what traders buy and sell.
Risks come in many forms, but the risks traders buy and sell can be roughly divided into two types: liquidity risk and price risk. Liquidity risk refers to the risk of not being able to trade—in plain terms, buying something but being unable to sell it, or wanting to buy something when no one is selling. Many traders in the stock market who operate in the short term are trading liquidity risk. Price risk, on the other hand, is easier to understand: it refers to the risk of large upward or downward price movements. The oil futures contract we just mentioned is an example of trading price risk.
Now that we understand the difference between investors and traders, we can move on to the main point: what does the Turtle Trading Rule actually say? Before hearing this, you need to be clear on one premise: these methods are aimed at traders.
The Turtle Trading Rule is a mechanical trading system developed by the masters Richard Dennis and William Eckhardt—the very two who made the bet we mentioned earlier. So what is a mechanical trading system? It is a rule-based algorithmic system. You provide the system with an input, and it gives you an output. This system doesn’t require you to exercise judgment—it only requires you to strictly follow the rules, playing the game by the system’s design.
Put this way, the system may sound rigid. But the author argues that rigid is good. People are highly stressed in market trading, and every decision involves real stakes. Under such circumstances, being completely rational is almost impossible. Emotions and cognitive biases severely interfere with our decisions.
The book lists several common cognitive biases that easily trap people. For example, the anchoring effect interferes with decision-making. The anchoring effect means that when making decisions, people often rely on easily accessible information. In the market, this manifests as focusing too much on recent price highs and lows. These highs and lows become “anchors,” and people use them to judge price levels. Then there is recency bias: people place more importance on recent data and experiences. Compared to a trade last week, yesterday’s trade matters more; compared to last year’s trade, last week’s matters more. This bias makes people short-sighted in their trading behavior, ignoring long-term trends. Another is the disposition effect, which means traders are more likely to sell stocks when prices rise, but when prices fall, they hold on tightly and refuse to let go.
Humans are not rational creatures, especially in the stock market. These cognitive biases make it harder to profit in trading. Therefore, in market trading, we truly need a strict system—one that is immune to emotions, where everything is done according to rules. Even if the rules themselves are not perfect, once you have rules, at least your decisions are consistent and do not change with your mood. Achieving this already makes trading far more reliable than relying on one’s feelings.
Now, let’s get into the specifics of the Turtle Trading Rule. We all know that to make money in the stock market, one needs to buy low and sell high. Everyone knows this truth, but how can we determine when prices are low and when they are high? This is difficult, and no one can predict it with 100% accuracy. However, as long as your judgment is slightly more accurate than others’, you can profit in the long run. The Turtle Trading Rule provides a method of judgment that we can use as a reference.
Before explaining the method, let’s cover two basic concepts: support and resistance levels. Picture a stock price chart in your mind—the K-line moving up and down like an electrocardiogram. If you look at a segment of this K-line and notice that it fluctuates between $15 and $17, then $15 is called the support level and $17 is called the resistance level. In other words, $17 acts as resistance, preventing the price from rising further, while $15 acts as support, preventing the price from falling lower. Once the price breaks through the support or resistance level, it tends to continue moving in that direction for quite some time, forming what we call a “trend.” The reason support and resistance levels appear is precisely because of the irrational behavior we mentioned earlier. Anchoring and recency bias lead people to judge stock prices based on easily available recent information, which causes prices to oscillate between support and resistance levels.
Now that we understand support and resistance, here comes the key question: when is the best time to buy? The author believes there are two best entry strategies. The first is a short-term strategy: look at the last 20 days of price movement. Once the price breaks through the 20-day resistance level—the highest point—you buy and go long. Conversely, if the price breaks through the 20-day support level—the lowest point—you sell and go short. The second is a long-term strategy: look at the last 55 days of price movement and follow the same approach. Break through resistance, buy and go long; break through support, sell and go short. A reminder here: this entry strategy is just one of the methods mentioned in the book. Since the Turtle Trading Rule was created over 30 years ago, whether it is still effective today is debatable. We’ll discuss this issue later.
Continuing on, after talking about when to enter the market, we now move to when to exit. Exiting the market has only two outcomes: you either profit or lose. But experienced traders first consider the bad outcome—losses. How much loss should trigger an exit? This is crucial. In trading, there’s a saying: there are old traders, and there are bold traders, but there are no old bold traders. Bold traders are those who don’t set stop-loss points and don’t know when to exit after losing too much. Traders who fail to use stop-losses almost always go bankrupt. And you must remember: once the price hits your stop-loss point, you must exit immediately, without a moment’s hesitation. Hesitation only leads to disaster.
So where should stop-loss points be set? The author believes that if you enter the market using the short-term strategy, then once the price falls below the lowest point of the past 10 days, you must exit. Conversely, if you went short, then use the highest point of the past 10 days as your reference: once the price rises above it, you must exit. If you used the long-term strategy to enter, then refer to the past 20 days’ prices to determine your exit. Once again, it must be emphasized: strictly follow your stop-loss point—do not hesitate.
After covering losses, let’s move to profits. Another old saying in trading is: “A bird in the hand never goes bankrupt.” But the author disagrees. Selling too early to lock in profits may cause you to miss out on much greater gains. So when should you sell to maximize profits? You should consider selling only after the trend has stabilized—when the stock price begins oscillating again between support and resistance levels. The author believes that as long as you strictly follow this trading strategy, you will, over the long term, achieve buying low and selling high.
That concludes the first part. Let me summarize: first, we understood what a trader is. Traders are those who buy and sell risk, focusing only on price. The Turtle Trading Rule is meant for traders, not investors. The trading method of the Turtle Traders, simply put, is this: if the price breaks the 20-day resistance (the highest point), buy; if the price falls below the 10-day support (the lowest point), sell. Of course, this is just the specific method described in the Turtle Trading Rule—it’s not an encouragement for you to use it blindly. Whether these rules will remain effective in the long run is debatable. And that’s exactly what we’ll discuss in Part Two.
Part Two
In the first part, we discussed the specific methods of the Turtle Trading Rules. They sound great—simple and easy to understand—as if you could just lie back and make money. But as we also mentioned, the rules were created over 30 years ago. Do they still work today? This is the main issue we will focus on in Part Two. Market trading is a complex system studied by countless experts and scholars, so naturally, there is not just one theory. Let’s step outside the book’s perspective and see what other experts have said.
The famous economist Eugene Fama proposed a well-known idea: the Efficient Market Hypothesis. The core of this hypothesis is that the price of an asset already reflects all available information about its intrinsic value. That sounds complicated, but put simply: the price you see for a stock is its true price. You don’t need to study it further—it is neither overvalued nor undervalued. It is worth exactly that much. Future changes in asset prices are not because the asset was mispriced but because of the arrival of new information. And since, by definition, we do not know when new information will appear, asset price movements are random, a “random walk.” A similar view is expressed in the book A Random Walk Down Wall Street, which we have discussed before on Investor’s Bookshelf. That book suggests you don’t need to waste time studying stocks—just buy a few randomly, hold them, and wait for them to appreciate.
But behind all knowledge, there lies a basic belief: through learning and research, we can discover some patterns that will help us predict the future. If the world’s changes were entirely random, with no patterns to be found, then what would be the point of research? Surely, the stock market must have some rules. Economist Robert Shiller argued that markets do indeed have bubbles, because people are irrational. Sometimes the stock market is priced too high, sometimes too low. Even if a company performs poorly, as long as people believe others are speculating on it and are willing to buy it, someone will surely take it at a higher price later. Based on this understanding, many people study trading methods, and the Turtle Trading Rules are one such method among many.
So, we have Eugene Fama’s Efficient Market Hypothesis and Robert Shiller’s theory of market bubbles. Both seem reasonable—so who is right? That’s a difficult question. Not only is it hard for us to answer, even the Nobel Prize committee couldn’t resolve it. Their solution was to award the 2013 Nobel Prize in Economics jointly to Eugene Fama and Robert Shiller.
After hearing these two conflicting views, perhaps we can try to reconcile them. Essentially, stock market movements are patternless, so as an investor, you could pick a random portfolio of stocks, hold them long-term, and still profit. But human irrationality is also an undeniable fact, and it influences people’s short-term trading behavior. So in the short run, stock market fluctuations do seem to follow some patterns.
Now let’s return to the original book, Way of the Turtle. How does the author, Curtis Faith, view the effectiveness of trading systems? He also believes that no trading system can remain effective forever. Let’s look at his reasons.
Faith argues that trading systems that have performed exceptionally well in the past will not necessarily do so in the future. In fact, the better a system’s past performance, the worse it may perform going forward. Why? He summarizes three reasons: the Trader Effect, the Random Effect, and Overfitting. Let’s examine them one by one.
The first reason for a trading system’s failure is the Trader Effect. In quantum mechanics, there is the uncertainty principle, which says that the act of observing something interferes with it. It sounds abstract, but it’s simple: something looks one way when you observe it and another way when you don’t—you can never know its true state. Similarly, in trading, there is a kind of uncertainty, which the author calls the Trader Effect. It means that traders’ actions change the state of the market itself. If a trading system becomes very profitable, other traders will notice, then start copying it. As more people adopt it, the strategy becomes less effective than before.
The second reason is the Random Effect. This is easy to understand. Some systems that look great based on historical data simply got lucky. Random effects are actually very common. You don’t even need to build a complex system to achieve “100% accurate” predictions of stock movements. Imagine this: stocks can only go up or down. You send predictions to 10,000 people—5,000 get an “up” prediction, 5,000 get a “down” prediction. The next day, half of them will have received a correct prediction. Then you split that half again, predicting up for some and down for others. After a dozen rounds, there will be a few people who received correct predictions every single time. This is how scammers trick people with claims of “100% accuracy.”
The third reason is Overfitting. Overfitting means that the more closely a model matches historical data, the worse it performs in predicting the future. In other words, if your model is used to make decisions and forecasts, rough sketches often work better than detailed realism. Mathematicians call this phenomenon “overfitting.” A trading system that aligns perfectly with past data will perform very poorly on unknown data. This seems counterintuitive—but why? Because all so-called “known data” contains errors. The more precisely you fit the past, the more those errors are magnified, and the worse your future predictions become. The author insists that trading systems must be simple. If tiny data changes cause huge swings in your model’s predictions, then it’s basically overfitting. A good model should not be overly sensitive. Someone once asked Nobel laureate Harry Markowitz how he invested. He said, “Half in stocks, half in bonds.” Simple as that.
That concludes Part Two. We discussed Eugene Fama’s Efficient Market Hypothesis and Robert Shiller’s market bubble theory. One argues that market prices move randomly and are unpredictable; the other argues that prices are driven by bubbles and therefore somewhat predictable. So, in the long run, prices are patternless. But human irrationality is also a fact, and it influences short-term trading behavior, making short-term market movements seem somewhat patterned. According to Curtis Faith, no trading system can remain effective forever—not only because long-term price movements are unpredictable, but also because of the Trader Effect, Random Effect, and Overfitting. These forces can cause a once-brilliant trading system to fade into mediocrity. As for the Turtle Trading Rules, though they helped the author make a fortune over 30 years ago, copying them exactly today may not be nearly as effective.
Conclusion
And with that, we’ve finished going through Way of the Turtle. Let’s review what we covered.
We discussed the book in two parts. In the first part, we looked at the difference between traders and investors. A trader is someone who buys and sells risk, caring only about price. The Turtle Trading Rules were designed for traders, not investors. We also introduced the specific methods used by Turtle traders. These methods appear simple and easy to understand, but since they were created over 30 years ago, we must carefully examine their effectiveness today.
In the second part, we discussed the issue of whether trading systems remain effective. We first stepped outside the book’s perspective and introduced Eugene Fama’s Efficient Market Hypothesis and Robert Shiller’s theory of market bubbles. From these, we learned that in the long run, stock market fluctuations are patternless. But human irrationality is also a fact, and it influences short-term trading behavior—so in the short run, market movements do seem to follow certain patterns. We then looked at Curtis Faith’s own view on trading systems: he believed that no trading rule can remain effective forever. This is not only because prices are unpredictable in the long term, but also because of the Trader Effect, the Random Effect, and Overfitting. These forces can cause a once-brilliant trading system to fade into irrelevance.
The specific trading methods introduced in Way of the Turtle may not hold much meaning for us today. But the ideas of the Trader Effect, Random Effect, and Overfitting are still insightful. The Trader Effect reminds us to think systematically about the world: a system is dynamic, and when you act, others act too. Before making a move, you must consider not just your own actions but the changes in the whole system. The Random Effect reminds us of the role of luck. If you refuse to acknowledge luck and try to force an explanation for every outcome, you may fall into the attribution fallacy—wrongly linking unrelated events. Overfitting teaches us not to get lost in data and details. A good model should not be overly sensitive to data. Data is important, but today people often overemphasize metrics and performance indicators. Focusing excessively on numbers and details can distract from what truly matters. A good decision captures the essentials. If someone ignores the main point and gets entangled in trivial details, you can rightly say they are “overfitting.”
Finally, it’s worth noting that when the Turtle Trading Rules were created, computers weren’t in use for trading. People recorded buy and sell orders on paper in exchanges, later using telephones—trading speed was nothing like today. In today’s fast-moving markets, the Turtle Trading Rules are somewhat outdated. Some even argue that the biggest flaw in strictly following them is the size of drawdowns—sudden, large losses in account value—that most people simply cannot endure.
All in all, market trading is a complex system, with many competing theories. The key is not to treat any single idea as the ultimate truth. By keeping this open mindset, we can continue to learn and improve.
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