Way of the turtle

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Way of the Turtle

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tion. Then, if the market moved, I would cancel the original order
and place a limit order much closer to the market or even on the
other side of the ask. For example, if I wanted to buy 100 contracts,
I might first place a fake sell order. If that fake order was a sell of
100 contracts at $415 and the market was trading at $410 bid and
$412 ask, the presence of the order might move the market to $405
bid and $408 ask. I then might cancel the fake limit order and enter
one to buy at a $410 limit that probably would get filled at $408 or
$410, which was the original ask before my first order.
I did not do this very often, just enough to keep other traders
guessing about what we were doing. In some respects it was a bit
like bluffing in poker. You cannot bluff all the time or you’ll get
called and end up losing the bluffs and your bets. However, an
occasional bluff can help your play considerably because it forces
the other players to call you sometimes when you actually have a
good hand, resulting in a larger pot when you have the winning
hand. You also may win pots with the bluff, and that also increases
your winnings.
Just as an occasional bluff makes it harder for your opponents to
figure out what you are doing, the Turtles added quite a bit of con-
fusion for anyone who was trying to figure out how Richard Den-
nis was trading. Some of us used small stops, some used larger ones,
some of us bought right at the breakout, some just after, some just
before; in all we created a lot of obfuscation that probably helped
him get better fills for his orders.
Note that a trader effect can occur without any conscious attempt
by traders to front-run other traders’ orders. If too many traders
attempt to exploit a given market phenomenon, that can ruin the
edge for that phenomenon, at least for a period, because their orders
Lies, Damn Lies, and Backtests
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will tend to dilute the edge. This problem is especially prevalent in
arbitrage-type trading, where the edge is relatively small.