Way of the turtle

Expectation: Quantifying the Edge
The term expectation is also derived from gambling theory and
answers the question “What happens if I keep doing this?” in quan-
tifiable terms. Positive expectation games are those in which it is
possible to win; the blackjack example above when the player
counts cards has positive expectation. Negative expectation games
are those such as roulette and craps where the house has the advan-
tage and so over the long run a gambler will lose. Casino owners
understand expectation very well. They know that games of chance
in which the house has a positive expectation of even just a few per-
centage points can provide large sums of money over the course of
multiple players and many days. Casino owners do not care about
the losses they incur because such losses only encourage their gam-
bling clientele. For owners, losses are just the cost of doing business;
they know they will come out ahead over the long run.
The Turtle Mind
• Think in terms of the long run when trading.
• Avoid outcome bias.
• Believe in the effects of trading with positive expectation.
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Way of the Turtle

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The Turtle Way views losses in the same manner: They are the
cost of doing business rather than an indication of a trading error
or a bad decision. To approach losses in this way, we had to know
that the method by which the losses were incurred would pay out
over the long run. The Turtles believed in the long-term success of
trading with positive expectation.
Rich and Bill might say that a particular system had an expec-
tation of 0.2; that meant that over time you would make 20¢ for
every dollar risked on a particular trade. They determined the
expectation for trading systems by analyzing a system’s historical
trades. Expectation was based on the average dollar amount won
per trade divided by the average amount risked. That risk is deter-
mined by the difference between the entry price and the stop loss
price (the price at which we would exit in the event of a loss), mul-
tiplied by the number of contracts traded, multiplied by the size of
the contract itself.
Here’s an example that illustrates how the Turtles measured risk.
For a gold trade entered long at $350 with a stop at $320 for 10 con-
tracts, there is a risk of the $30 difference between the entry price and
the stop loss exit price multiplied by the position size of 10 contracts,
multiplied by the size of the contract itself, which is 100 ounces. Once
those numbers are multiplied, you have a total of $3,000.
The Turtles were encouraged to look at the long-term results of
a specific approach and ignore the losses we expected to incur
while trading with that approach. In fact, we were taught that peri-
ods of losses usually precede periods of good trading. This training
was critical to both the Turtles’ potential success and their ability
to keep trading according to a specific set of rules through extended
periods of losing trades.
The First $2 Million Is the Toughest
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