Way of the turtle

91

---

Low Returns
If a trader is expecting to achieve returns of 30 percent per trade,
this goal can be achieved by using a system that returns 30 percent
each year reliably or by one that returns 5 percent in year 1, 5 per-
cent in year 2, and 100 percent in year 3. After three years, each of
these systems will have returned the same average CAGR (com-
pound average growth rate) of 30 percent. However, most traders
would argue that a system that returned 30 percent each year would
be preferable because it would offer a smoother equity curve.
All else being equal, we have found that a system that consis-
tently delivers good returns will be more likely to offer good returns
in any future period. Therefore, the risk of having that system
deliver subpar returns in any given single year will be lower than
for a system that had more erratic historical returns.
Price Shocks
A price shock is a sudden or very rapid movement in price that gen-
erally is caused by a natural catastrophe, unforeseen political event,
or economic disaster. Since I started trading, there have been two
very notable price shocks: the U.S. stock market crash of 1987 with
its subsequent financial repercussions and the September 11, 2001
attack on the World Trade Center in New York City.
The first price shock occurred when I was trading a $20 million
account for Richard Dennis. I remember it well. I actually made a
bit of money on the day of the crash, but the next day was a differ-
ent story.
Eurodollars closed on Black Monday, October 19, 1987, at
90.64, close to their contract low of 90.15 that had been set two
days previously and had been tested earlier that morning with a low
92
•
Way of the Turtle

---

at 90.18. I was short something like 1,200 contracts of December
eurodollars and another 600 T-bills. I also had significant long posi-
tions in gold and silver and large positions in a few currencies.
The next morning the eurodollar opened up at 92.85, more
than two points higher and about $5,500 per contract without any
opportunity to exit. This was a price we had not seen in eight
months. Additionally, gold opened down $25 and silver opened
down over $1. Figure 7-3 shows the eurodollar market on the day
of this price shock.
In total, I was down about $11 million on the $20 million
account I was trading for Richard Dennis. Essentially my entire
year’s profits had vanished overnight.
By What Measure?
•