Legends of Trading (Part 3): The Experimenter Who Changed the Way We Look at Trading

In the world of professional trading, there are only a few personalities who have left an indelible mark on the industry and have literally become legends. One of them is undoubtedly Richard Dennis - a legendary trader and popularizer of trading, that you may not have heard of yet.

Born in Chicago in 1949, Richard Dennis had all the ingredients for a successful career in trading - he was fascinated by numbers and patterns from an early age. Dennis's career began early, as he experimented with commodity futures as a teenager. He gradually honed his skills by carefully studying market behavior and trying out different trading techniques. Although he encountered setbacks along the way, his persistence and thirst for knowledge drove him forward. Dennis has achieved unprecedented success in his career. In the 1970s he borrowed $1,600 to start trading, and in just 6 years he reportedly multiplied that amount to a hard-to-believe $350 million. While such trading success is rare, Dennis' strategy and best trades may inspire you.
 

_{Richard Dennis in the 1980s}

Trading strategies

Richard Dennis' trading strategy used technical and fundamental analysis combined with disciplined risk management. He believed in a systematic approach to trading and relied on predetermined rules and guidelines, rather than impulsive decision-making based on emotion or subjective judgments. His strategy focused primarily on following trends. The aim was thus to identify and follow major market trends, whether they related to currencies, commodities, or other financial instruments. He believed that trends held the potential for significant profits and tried to stay on those trends for as long as possible. His approach can thus be described as akin to a position and swing strategy.

In determining when to enter a trade, Richard Dennis used a combination of technical and fundamental analysis. He analyzed price charts, identified key support and resistance levels, and used various technical indicators to assess market movement and timing. This technical analysis helped him identify potential entry points and confirm the validity of the trend. In addition to technical analysis, Dennis also incorporated fundamental analysis into his trading decisions. He studied macroeconomic factors, market fundamentals, and events that may have affected the markets. Dennis's trading strategy also placed great emphasis on disciplined risk management. He understood the importance of protecting capital and limiting losses. He set stop-losses on every trade to manage his risk and avoid excessive losses in volatile market conditions.

The size of the position is the key

A key element of Dennis' trading strategy was position size. He allocated a percentage of his trading capital to each trade based on the level of risk associated with it. The exact percentage varied depending on market conditions and his assessment of the trade's potential. Dennis used a concept known as "volatility-based position sizing." He used the Average True Range (ATR), a measure of market volatility, to determine the size of his positions. The ATR provided an estimate of the average price range of the market over a period of time, allowing him to adjust his position size depending on market volatility. In periods of higher volatility, he reduced the position size to manage risk, while in periods of lower volatility, he increased the position size to take advantage of potential larger moves.
 

_{Long-term volatility on XAU/USD according to the ATR indicator (14). ATR growth indicates increased volatility in the market. A price reversal with an increase in ATR would indicate the strength behind the move. However, the ATR does not indicate a direction, so a rising ATR may indicate selling or buying pressure. Thus, the higher the ATR value, the higher the probability of a trend reversal may be. Low values of the indicator are typical of periods of long sideways movement that occur at market tops and during consolidations.}

In terms of the amount of capital he risked on each trade, Richard Dennis advocated a controlled and conservative approach. He believed in limiting the risk per trade to a small percentage of his total trading capital - usually between 1% and 2% per trade. The goal of this approach was to protect capital and prevent catastrophic losses if a trade did not go as planned. Below then are some tips for novice traders from Rich Dennis.

What advice did Richard Dennis give to aspiring traders?

1. Emotions must be put aside

   Dennis stressed the importance of developing a systematic trading approach based on rules and discipline. Emotions and impulsive decisions have no place in successful trading.

2. Risk management is key

   Capital protection is paramount. Dennis emphasized the need to effectively manage risk by setting stop-loss orders and limiting position sizes to protect capital during periods of volatility.

3. Monitor trends

   Dennis believed in the power of trend-following. Identifying prevailing trends and trading with them allowed him to follow market dynamics and make substantial profits.

4. The ability to adapt is important

   Markets are dynamic and traders must adapt to changing conditions. Flexibility and the ability to adjust strategies when necessary were key to Dennis' approach.

5. Keep on learning

   Dennis' insatiable thirst for knowledge was key to his success. He encouraged traders to constantly seek out new information, study market patterns and refine their trading strategies.

Richard Dennis's most important trades

Trade on the US dollar

In the early 1980s, Richard Dennis made a bold prediction regarding the strengthening of the US dollar. The U.S. was just recovering from a "lost decade" when massive inflation and high interest rates had put significant pressure on economic growth and stock markets. The effects of the crisis reverberated well into the early 1980s. Dennis, however, anticipated a significant boom in the US economy and the growth of the dollar, so he took a large long position in the market. When global economic conditions matched his prediction, the dollar did indeed experience significant growth.
 

Trade with the Japanese yen

In the mid-1980s, Richard Dennis turned his attention to the Japanese yen and identified an interesting opportunity. He anticipated that the yen would decline in value, primarily as a result of the Bank of Japan's monetary policy decisions. Dennis took a short position on Japanese yen futures, taking advantage of the currency's downward trajectory. His trade turned out to be incredibly profitable.
 

_{Significant depreciation of the JPY against the USD in the mid-1980s. Source: Macrotrends}

Trading coffee

Another of Richard Dennis' notable trades involved coffee futures. In the early 1980s, he observed a shortage of supply in the coffee industry due to adverse weather conditions and crop failures. Dennis anticipated that this shortage would significantly increase coffee prices. Therefore, he took a long position on coffee futures contracts and rode the sharp rise in prices.
 

The silver trade

Richard Dennis traded not only currencies and agricultural commodities. In the late 1970s, he spotted an opportunity in the silver market. He was convinced that this precious metal was undervalued and therefore took a long position in futures. When concerns about global inflation increased and investors sought safe assets, the price of silver rose sharply. Dennis' foresight paid off handsomely, and he profited from the bull run.
 

_{The significant rise in the price of silver towards the end of the 1970s. Source: Macrotrends}

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Turtle Trading experiment - from beginner to trading star

In the early 1980s, Richard Dennis embarked on a remarkable experiment that was to revolutionize the world of trading. He believed that anyone with the right training and discipline could become a successful trader. To prove his theory, he selected a group of individuals, known as "Turtle Traders", who had almost no previous trading experience. Dennis provided them with a set of rules and guidelines that formed the basis of his trading strategy.

The goal of the Turtle Trading experiment was to show that success in trading can be learned and is not an innate talent. Dennis believed that successful trading required a systematic approach based on solid principles. Turtle Traders went through intensive training to learn about position sizing, risk management, and the importance of following predetermined rules. This experiment showed that a disciplined, rules-based trading methodology can produce above-average results.

The results of the Turtle Trading experiment were excellent. Over the course of several years, these "turtle traders" achieved significant profitability. Many of them went on to successful trading careers and became well-known figures in the trading industry. Notable Turtle Traders included Jerry Parker, Paul Rabar, and Curtis Faith, who founded their own successful hedge funds or trading companies. Their successes demonstrated the effectiveness of the Turtle Trading strategy and the power of a disciplined, rules-based approach to trading.

It is important to note, however, that while the Turtle Trading experiment has produced impressive results, not all participants have achieved the same level of success. Some traders had difficulty implementing the strategy effectively or failed to consistently follow the predefined rules. However, the overall conclusion of the experiment was that with proper training, discipline, and adherence to a proven trading methodology, traders can achieve significant profits and long-term success.

The Legacy of Richard Dennis

Richard Dennis' influence on the world of trading is immeasurable. His bold experiment with Turtle Traders demonstrated the power of a disciplined and rules-based trading methodology. With his pioneering strategies, Dennis demolished the notion that successful trading was reserved for a select few. His wisdom and lessons continue to inspire traders around the world, emphasizing the importance of lifelong learning, risk management, and a systematic approach to trading.

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