Wednesday, December 19, 2007

My Thoughts on Turtle Traders

JMJAtlanta said...

I'm interested in your thoughts on the books you're reading and whoever "Theresa" is.

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One book that I have started re-reading in recent weeks is "The New Market Wizards" by Jack D Schwager. In particular, I wanted to re-read the interview with William Eckhardt, one of the two people who became famous for the Turtle Trader experiment. (Richard Dennis was the other person).

Bill Eckhardt once said:

"Anyone with average intelligence can learn to trade."
Eckhardt was actually the one who opposed Dennis' view that great or successful traders can be taught. But somehow, in the course of conducting the Turtle trading experiment, his views changed, which of course led to the above quote.

Anyone can learn to trade, that is true - on the surface. However, that statement comes with subtle complications, so I wanted to peel the onion a few layers in order to see what is the truth that lies beneath.

The whole notion that successful traders can be taught is built on the premise that the concepts of successful trading can be reduced to a finite body of knowledge that can be documented and taught to those willing to learn. It would not be a stretch of truth to carry the premise espoused by Dennis & Eckhardt one step further and offer a "Trading 100" and "Trading 200" academic program, complete with a Bachelor's Degree. The Turtle Trader website offers a course in trading successfully, and indeed, they are one of vast plethora of teachers, coaches, and mentors who offer to teach you to be a successful trader.

I don't question that a certain level of knowledge of trading is required in order to be successful. However, the interview with Eckhardt in the Market Wizards book left me with the impression that knowledge of trading is sufficient for success. After all, anyone can be taught to be a great trader, right? If anyone can be taught to be a great trader, then why isn't everyone and their grandmother a great trader ?

The more contemporary view of trading nowadays is one that is founded upon a performance based model. More and more respected traders have talked about how trading is a performance activity, and how trading is better compared with performance sports like a basketball player or football player than with a knowledge based vocation like Engineering, or even lawyers. And I think it just makes plain sense to think of, and to model trading as a performance activity: you get paid (or even penalized) based on your performance, you have to keep practicing and practicing dutifully, diligently, and without end on certain aspects of trading in order to improve, each day that you trade (ie., game day) is really a performance test of how well you are internalizing everything that you have learned and practiced, and you are constantly in competition with other (anonymous) traders. And in that sense, a star trader is no different from a star athlete.

You know how to play basketball. I know how to play basketball. So why aren't we both in the NBA, pulling down those multi-million dollar salaries? Simple, it's because we don't perform as well as a Steve Nash, or a Kevin Garnett. It could be that they were born with it, or they worker harder at becoming better, but they have developed a higher level of skills at playing basketball. That's the unfortunate part about aspiring to be an athlete - the pre-requisite skill set and aptitude is more at a physical level. My performance as a basketball player is only as good as my physical abilities.

And along that same line of thinking, I've read a few books on trading, and though I haven't yet taken Teresa's trading course, I have signed up for more than one trading service and/or product on more than one occasion. I feel that I have some knowledge of trading, so why haven't I become a successful trader? Simple, it's because my performance just was not good enough. There's a million different reasons to explain inadequate performance, but at the end of the day, the path towards successful trading can be boiled down to having at the very least an observable trading system with at the very least an observable edge (as opposed to a measurable or controllable edge), and the desire, patience and discipline to follow and trade within the rules of your system, day in and day out.
That's what I mean when I previously said that all paths lead to Rome. The reality is that the ability AND the capacity to follow the rules of a trading system will inevitably depend on my attitudes, behaviours, and aptitudes, and these things just can't be taught, no matter how you slice and dice that.
My physical abilities are finite and can't be changed, but fortunately, my performance as a trader is dependent more on my mental and emotional skills. And by that, I mean that the degree of success that I can achieve in trading is governed by my capacity to change and internalize the right attitude, behaviour, and aptitudes. It is always a process that takes time, and a learning process at that.

So, yes, anyone can be taught to be a successful trader, but at the same time, there's a lot more to it than just that.


JMJAtlanta said...

Very insightful post.

What made Larry Bird so good at basketball? He was short, couldn't jump, and was slow. Practice and dedication.

Tom Watson was an "average" golfer in college. He practiced more than anyone else.

Another avenue on "can trading be learned" is examining the difference between knowledge and action. You can be an "average" trader, or you can practice with passion.

BTW: Thanks for clarifying that it was Theresa Lo you were speaking of. I enjoy reading her articles, and use some of her ideas on quant. testing. Personally, I don't think I'd last long as an automated system trader. But that's me.

Tyro said...

Let's not forget that the Turtle system required a relatively large account, had drawdowns which spanned years and which exceeded 50% and despite knowing this, it still had many trained and intelligent traders who failed to follow the rules and realize its potential. Considering the fact that the Turtles were highly selected (not randomly chosen) and many failed early, I don't think you could say the experiment shows that everyone can trade.

And even if you knew that you could successfully follow the Turtle system, do you have the resources to do so - can you weather the multi-year drawdowns and is your account big enough to take all signals? Would you want to?

I'm wondering if, now that you no longer have to look to trading for a steady income, you'll be free to try strategies which are longer term and perhaps easier to follow. What do you think?