React, Not Predict - a Basic Tenet fo the Turtle Way to Trade

By: Darrell Jobman

The following is an excerpt from Profitable Trading the Turtle Way

I am a diehard technical analyst myself, but I personally do not believe that anybody can predict the future when it comes to markets or anything else.

Unlike the "bad" forms of technical analysis which try to predict price action, what I call the "good" forms of technical analysis are more reactive – that is, we notice something is happening, and we then react appropriately.  As a trend follower, I will never buy (or sell) something because I think the price is going to go up (or down).  In fact, I shouldn’t even be thinking that way to begin with because I really have no idea about direction, and I shouldn’t even kid myself that I do.

What I do is this:  I wait for the price to move by a certain amount first, revealing its direction. Only then do I take a position because I assume the move is going to continue.  The truth is I really have no idea if the move is going to continue or not, but I rely on Newton's Law of Physics, which says that something in motion tends to stay in motion (until it stops).

Turtles know that fundamentals underlie market activity, but we don’t need to know what they are.  However, we do have our own set of technical terms that we use to describe and/or quantify the underlying economic fundamentals.  For example, I have explained that when supply and demand are in equilibrium, prices will tend to stay in some sort of trading range.  However, if or when something happens to change that existing balance of supply and demand, the price will shift into a new level to reflect that change in market conditions.

Prices of some things are fairly stable and constant their entire lives, but when it comes to prices and values in the commodity or financial markets, nothing remains the same forever.  Whatever range a market may be in presently, that whole price curve can move somewhere else in the future.  In fact, we're banking on it.  We just need a system to tell us when is the right time to enter or exit the market.  In the Turtle system, that involves reacting to price activity that the market is already revealing.

Going With the Breakouts

In the language of technical analysis, conditions of equilibrium are known as consolidations, and periods when prices are shifting are known as trends.  It is pretty much a fact of life that both types of conditions can and do exist at various points during the life of any commodity or stock issue (although obviously not both at the same time).

During the consolidations (periods of equilibrium), prices will remain within in a trading range.  Often, a price starts moving up or down, and it looks like there might be some kind of a breakout from the current range.  However, as long as prices remain in consolidation, if the price goes too high (or too low), the breakout fails and the price retreats back inside the trading range.  Needless to say, during these times, trend followers are unable to make money.

Of course, at other times breakouts succeed and new trends to develop successfully.  The supply/demand equilibrium and, thus, the fair market value or price, has indeed shifted to a different level, maybe due to some fundamental structural change in market conditions or maybe just due to the psychological  perception of change.  It is important to emphasize once again that, as traders and trend followers, we do not really care why the move is happening.  All that matters is that we react appropriately to take advantage of the move and make some money for ourselves.

As I said, it is my opinion that nobody can predict when markets are really going to move and which new breakouts are going to develop into successful trends versus which ones will fail.  People who spend time trying to develop systems that attempt to predict some market's future price movements are focusing on the wrong thing.

The whole idea of trend following is not to try to predict the future but to just notice the trends that are in the process of developing and then react to them.  And that is really all that the Turtle system does, although we do have a few proprietary indicators and filters that may help us do a little better job of recognizing which current moves will potentially be the bigger ones so that we can adjust our trades appropriately.

Forget Fundamentals

Richard Dennis explained to the Turtles the two basic ways to approach analyzing the markets – from a "fundamental" or from a "technical" viewpoint or, as he described it to us, from a "predictive" or a "reactive" viewpoint.  The fundamental traders read a lot of research reports, extrapolate a lot of calculations, and try to determine if something is overvalued or undervalued.  Then they try to predict future prices.  This whole undertaking requires a lot of work, manpower, time, and effort.  Some firms hire analysts to do nothing all day except digest crop reports or try to read between the lines of the Federal Reserve chairman's latest speech.

But, as they taught the Turtles, Dennis and Eckhardt thought this was all just a huge waste of time.  They believed that almost nobody had enough time and resources to do this kind of work correctly.  Rather, they believed, as do all pure technicians, that all of the relevant information – known and unknown, past, present, and future – would already be reflected in the price movements of a daily bar chart.  So we were all taught to simply focus on reading the charts.

It's funny to think about that now, but not only did we read charts, we also actually kept and updated them ourselves with a pencil and a ruler in a big paper book.  We didn't even know what a computer was back then.  But even with our "primitive" methods, the system worked.

Reacting, Not Predicting

Chart reading technicians can have different approaches to the markets.  Some draw lines and angles and waves and then they try to extend them out into the future to predict where prices are going.

But that's not what the Turtles do.

The bottom line is that our Turtle training taught us not to try to "predict" anything.  What we do is simply "react."  The price moves, and we react.

We are trend followers.  If the price starts moving up, we react by looking for an opportunity to buy the market.  If the price starts moving down, we react by looking for an opportunity to sell the market.  We never buy or sell because we "think" the market is going to go up or down.  Instead, we wait for it to start moving first; then we react by taking a position in the appropriate direction.

And when it comes time to get out of a position, the Turtle method is basically the same thing.  We look at our charts every day and when we see that the market is no longer moving in our direction and, in fact, may have started going in the other direction, we know it's time to get out.  Of course, when we first get into a trade, we have no idea where or when this exit signal is going to take place.