Way of the turtle

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Way of the Turtle

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to more specific market behavior. Keep your systems simple and
you will find that they hold up better over time. 
Market Diversification
One of the most effective ways to improve the robustness of your
overall trading is to include a diverse range of markets. If you trade
more markets, you increase the chance that you will encounter
conditions favorable to your trading system in at least one of those
markets. In the case of trend-following systems, if you trade more
markets, you boost the odds that for any particular period there will
be a trend in one of those markets.
This means that you want to have a portfolio that includes as
many markets as possible. The markets should present new oppor-
tunities, and so they should not be highly correlated to other mar-
kets. For example, there are several short-term U.S. interest-rate
products that move almost in lockstep. Adding more than one of
these products to your portfolio will not add diversity. 
If you are trading systems that do not require close monitoring,
you should consider trading foreign markets. Those markets can add
a lot of diversification and help make your trading more robust and
consistent. Any of the systems shown here that buy on the open
based on closing price data will be relatively easy to trade on mar-
kets around the world because the time-zone differences are less
important if you have to worry about only market closes and opens.
Deciding Which Markets to Trade
At this time, the most popular platform for testing systems,
TradeStation, has the extreme limitation of being unable to test
Bulletproof Systems
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more than one market at a time. One side effect of this is that many
traders think in terms of markets, not portfolios. This has led to the
erroneous belief that some markets should not be included in a
trend-following portfolio because those markets are not profitable
or because they underperform compared with others.
There are two problems with this perspective. First, trends may
happen only every several years in some markets, and so short tests
of 5 or 10 years will not show the market’s full potential. Second,
the benefit of diversification for a market may outweigh any nega-
tive profitability.
Consider the cocoa market example from Chapter 4. Recall
how that market had a long string of losing trades before there
was a good trend. This is very common. Here’s an example from
my Turtle days that is particularly noteworthy. In the early part
of 1985 Rich told us we no longer could trade coffee. I think he
felt that there was not enough volume for us to trade it and we
had been consistently losing money with it. That decision caused
us to lose out on what would have been our single biggest trade
(see Figure 13-1).
Since I did not take that trade, I can’t tell you exactly what I
would have made from memory, and so I performed a test using
the data from the March 1986 coffee contract. At the time of entry,
the value for N was 1.29 cents. This meant that I would have been
trading a unit size of 103 contracts since I traded a $5 million
account for all of 1985. Because we traded four units at a time, I
would have been long 412 contracts of coffee for that trade. The
profit would have been approximately $34,000 per contract. The
aggregate profit for the trade would have been 412 times $34,000,
or approximately $14 million, representing a 280 percent return on