Is Trading With the Trend the Turtle Way?

Over the last few weeks, I have felt increasingly more confident that the method of trading stocks illustrated here is one conducive for making profits in the markets. It may need some slight tune ups here and there, like as mentioned in the previous post, but all in all, I think its a system based on a strong foundation.

This foundation is based on four principles, which again are:

• Going with the flow by trading with the trend
• Risk management, which uses the 50dma as a stop out point, and using the PPO to define risk
• Locking in gains that occur since the 50dma moves as the the stock moves
• Cutting losses short and letting winners run

I have recently started reading another trading book, and this book is called "The Way of the Turtle" by Curtis M. Faith. I would highly recommend reading this book.


In the 1980's two successful traders made a bet to determine whether or not it was possible to train individuals to become successful traders or to whether successful traders are simply born. As part of this bet, the two selected about dozen people to be apart of a experiment.

The man who bet that traders are made and not born, Richard Dennis, reportedly said that he was going to raise traders like they raise turtles in Singapore. One of these "Turtles" was Curtis Faith, and in his book, he goes through the training he received, and the mentality he acquired through the training process.

It turns out that Mr. Dennis won the bet, at least in terms of Mr. Faith's performance, as he turned his 2 million dollar account into over 30 million.

Anyway, back to the point, in this excellent book, "The Way of the Turtle" sums up the lessons learned in these three essential points:

1. Trade with an Edge: Find a trading strategy that will produce positive returns over the long run because it has a positive expectation (Going with the trend gives us the edge)
2. Manage Risk: Control risk so that you can continue to trade or you may not be around to see the benefits of a positive expectation system (Take small losses, let winners run)
3. Be Consistent: Execute your plan consistently to achieve the positive expectation of your system (Cutting losses when 50dma is broken, no exceptions)
4. Keep it Simple: The core of our approach was simple: catch every trend. Two or three trades might account for all your profits, so don't miss a trend or you might kill your whole year. This is simple and easy to understand, not easy to do. (Buying stocks that are trending is not a rocket science)

There will be no mega trending stock posted this week. Here are the results so far:

Using Percentage Based MACD to Manage Risk

This blog has been in existence for almost four months now. In this time, I have selected many stocks that would have been very profitable. I must also admit though that many others would have lost a lot of money.


I feel that in order to improve results, we should focus more closely on the stock trading techniques of market legend Jesse Livermore. Besides being made famous for his trend trading strategies, Jesse Livermore was also known for his risk management techniques. Livermore would set tight stops on all his positions, which meant that he would take many small losses. These small losses were more than made up though by the occasional gigantic gain.

With this in mind, this strategy requires more focus on risk management. The rules of this strategy dictate that the stock should only be dumped when the 50 day moving average (dma) is broken. Therefore, it is integral to determine how far the stock is from the 50dma. This is such an important piece of information because it represents the amount we are willing to lose before discarding the stock.

Fortunately, there is an easy way to determine how far a stock is from its 50dma by using an indicator called the PPO. The excellent website, StockCharts.com, has a very thorough explanation of many types of indicators including the PPO here.

The PPO essentially is a percentage based version of the MACD (moving average convergence divergence). The PPO takes the percentage difference between 2 moving averages, and then takes a moving average of that difference.

If we tell the PPO to take the difference between the 1 day moving average of price and the 50 day moving average of price, and then take a 1 day moving average of the difference, then it will tell us the information we are looking for.

Here is this week's mega-trending stock with this new indicator. The PPO will make a lot more sense when seen in context, so here it is:



I think the above chart shows how powerful StockCharts.com can be. I have spent thousands of hours tinkering with Stockcharts.com's features, and I am still finding out new things. There is no technical analysis tool that I could recommend more highly than StockCharts.com.

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