Trend Following (Updated Edition) - Pearsoncmg
Praise for Trend Following“Michael Covel’s Trend Following: essential.”—Ed Seykota, trend follower and original market wizard“Trend Following by Michael Covel? I’m ‘long’ this book.”—Bob Spear, developer of Trading Recipes Software“Michael Covel’s Trend Following is a breakthrough book that captures theessence of what really makes markets tick. Diligently researched andcomprehensive in scope, it will replace The Market Wizards as the must-readbible for a new generation of traders.”—Jonathan Hoenig, portfolio manager, Capitalistpig Hedge Fund LLCand Fox News contributor“Investment books that have a lasting appeal offer insight that resonates with alarge number of investors. We believe Michael Covel’s Trend Following will besuch a book.”—Richard E. Cripps, Legg Mason chief market strategist“Please read [Trend Following] whether you think you have an interest in trendfollowing or are not sure Covel has hit a home run with it.”—Gail Osten, editor-in-chief, Stocks, Futures, & Options magazine“Michael Covel has written the definitive book on trend following. With carefulresearch and clear insight, he has captured the essence of the most successful ofall trading strategies. Michael knows his subject matter and he writes about itwith passion, conviction, and enthusiasm. This enjoyable and well writtenbook is destined to become a classic.”—Charles LeBeau, author of Technical Traders Guide to ComputerAnalysis of the Futures Markets“Trend Following is an engrossing and educational journey through theprinciples, pitfalls, players, and psychology of aggressive technical trading ofthe investment markets. [It is] rich in its wisdom and historical study.”—Gerald Appel, president of Signalert Corporation and publisherof Systems and Forecasts newsletter
“Conventional wisdom says buy low and sell high, but what do you do nowthat your favorite market—be it a stock, bond, or commodity—is at an all-timehigh or low? For a completely different perspective, from people who actuallymake money at this business, take a look inside. Michael Covel has written atimely and entertaining account of trend following—how it works, how to do it,and who can do it. While it’s not for everybody, it might be for you.”—Charles Faulkner, NLP modeler and trading coach, featured innumerous books including The New Market Wizards“I think the book did a superb job of covering the philosophy and thinkingbehind trend following (basically, why it works). You might call it the MarketWizards of Trend Following.”—Van K. Tharp, Ph.D., president, International Institute of TradingMastery, Inc. Van was originally profiled in The Market Wizardsby Jack Schwager.“I think that this book documents a great deal of what has made trendfollowing managers a successful part of the money management landscape(how they manage risk and investment psychology). It serves as a strongeducational justification on why investors should consider using trendfollowing managers as a part of an overall portfolio strategy.”—Tom Basso, retired CEO, Trendstat Capital Management, Inc.Tom was originally profiled in The New Market Wizardsby Jack Schwager.“Michael Covel mixes a unique blend of trend following matters with thethoughts and quotes of successful traders, investors and society’s leaders.This is a valuable contribution and some of the best writing on trend followingI’ve seen.”—Robert (Bucky) Isaacson, managed money and trend followingpioneer for more than 30 years“Trend Following: Definitely required reading for the aspiring trader.”—David S. Druz, tactical investment management and trend followerfor 25 years“Michael Covel reveals the real secret about trading—that there is no secret. Hispoints are peppered with wisdom from experts across the industry.”—John Ehlers, president, MESA Software
Trend Following(Updated Edition)
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Trend Following(Updated Edition)Learn to Make Millionsin Up or Down MarketsMichael W. Covel
Vice President, Publisher: Tim MooreAssociate Publisher and Director of Marketing: Amy NeidlingerExecutive Editor: Jim BoydEditorial Assistants: Myesha Graham and Pamela BolandOperations Manager: Gina KanouseDigital Marketing Manager: Julie PhiferPublicity Manager: Laura CzajaAssistant Marketing Manager: Megan ColvinCover Designer: Chuti PrasertsithManaging Editor: Kristy HartProject Editor: Betsy HarrisCopy Editor: Deadline Driven PublishingProofreader: Kathy RuizSenior Indexer: Cheryl LenserCompositor: Nonie RatcliffManufacturing Buyer: Dan Uhrig 2009 by Pearson Education, Inc.Publishing as FT PressUpper Saddle River, New Jersey 07458This book is sold with the understanding that neither the author nor the publisheris engaged in rendering legal, accounting or other professional services or advice bypublishing this book. Each individual situation is unique. Thus, if legal or financialadvice or other expert assistance is required in a specific situation, the services ofa competent professional should be sought to ensure that the situation has beenevaluated carefully and appropriately. The author and the publisher disclaim anyliability, loss, or risk resulting directly or indirectly, from the use or application ofany of the contents of this book.FT Press offers excellent discounts on this book when ordered in quantity for bulkpurchases or special sales. For more information, please contact U.S. Corporateand Government Sales, 1-800-382-3419, corpsales@pearsontechgroup.com. Forsales outside the U.S., please contact International Sales at international@pearson.com.Company and product names mentioned herein are the trademarks or registeredtrademarks of their respective owners.All rights reserved. No part of this book may be reproduced, in any form or by anymeans, without permission in writing from the publisher.Printed in the United States of AmericaEighth Printing: March 2011ISBN-10: 0-13-702018-XISBN-13: 978-0-13-702018-8Pearson Education sonEducation Australia PTY, Limited.Education Singapore, Pte. Ltd.Education North Asia, Ltd.Education Canada, Ltd.Educación de Mexico, S.A. de C.V.Education—JapanEducation Malaysia, Pte. Ltd.The Library of Congress Cataloging-in-Publication data is on file.
For Uyen.
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ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiiiPreface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xviiAcknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiPart I.11 Trend Following . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Winning Versus Losing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Investor Versus Trader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Fundamental Versus Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Discretionary Versus Mechanical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11In Plain Sight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Modus Operandi: Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Follow the Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 Great Trend Followers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27David Harding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Bill Dunn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32John W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Ed Seykota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Keith Campbell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Jerry Parker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71ix
xTrend Following (Updated Edition): Learn to Make Millions in Up or Down MarketsSalem Abraham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Richard Dennis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Richard Donchian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Jesse Livermore and Dickson Watts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Part II74788590. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953 Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97Absolute Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Fear of Volatility and Confusion with Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Drawdowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106Correlation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Zero Sum Nature of the Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114George Soros and Zero Sum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1164 Big Events, Crashes, and Panics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Event #1: 2008 Stock Market Bubble and Crash . . . . . . . . . . . . . . . . . . . . . . 126Day-by-Day Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Event #2: 2000–2002 Stock Market Bubble . . . . . . . . . . . . . . . . . . . . . . . . . . 138Event #3: Long-Term Capital Management Collapse . . . . . . . . . . . . . . . . . . . 151Event #4: Asian Contagion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164Event #5: Barings Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168Event #6: Metallgesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175The Always “New” Coming Storm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1785 Baseball: Thinking Outside the Batter’s Box . . . . . . . . . . . . . . . . . . . . 181The Home Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182Moneyball and Billy Beane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185John W. Henry Enters the Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186Red Sox 2003–2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188Part III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1916 Human Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Prospect Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Emotional Intelligence: Daniel Goleman . . . . . . . . . . . . . . . . . . . . . . . . . . . .Charles Faulkner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ed Seykota’s Trading Tribe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Curiosity Is the Answer, Not Degrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Commitment to Habitual Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Occam’s Razor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fast and Frugal Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Innovator’s Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Process Versus Outcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193194200201202204206211212213216218
xiContents8 Science of Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Critical Thinking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chaos Theory: Linear Versus Nonlinear . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Compounding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Holy Grails . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Buy and Hold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Warren Buffett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Losers Average Losers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Crash and Panic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Analysis Paralysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Part IV221222224229231232234235238241243. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24510 Trading Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Risk, Reward, and Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Five Questions for a Trading System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Your Trading System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Frequently Asked Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 The Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Slow Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Blame Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Understand the Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Decrease Leverage; Decrease Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fortune Favors the Bold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .After word . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Inefficient Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Trend Following Critics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Critic Geetesh Bhardwaj . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Foreword to the First Edition by Charles Faulkner . . . . . . . . . . . . . . . 96299Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303Introduction to Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A Trend Following for Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Does Trend Following Work on Stocks? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Short Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tax Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Capitalism Distribution: Observations of IndividualCommon Stock Returns, 1983–2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .305307307318318331338
xiiTrend Following (Updated Edition): Learn to Make Millions in Up or Down MarketsB Performance Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347Trend Following Historical Performance Data . . . . . . . . . . . . . . . . . . . . . . . . 347Abraham Trading Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347Campbell & Company, Inc.—Financial Metals & Energy—Large Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349Chesapeake Capital Corporation—Diversified Program . . . . . . . . . . . . . . . . . 352Clarke Capital Management, Inc.—Millennium Program . . . . . . . . . . . . . . . . 354Drury Capital, Inc.—Diversified Trend Following Program . . . . . . . . . . . . . . 355DUNN Capital Management, Inc.—World Monetary Assets . . . . . . . . . . . . . . 356Eckhardt Trading Company—Standard Program . . . . . . . . . . . . . . . . . . . . . . 359John W. Henry & Company, Inc.—Financials and Metals Program . . . . . . . . 361Millburn Ridgefield Corporation—Diversified Program . . . . . . . . . . . . . . . . . 363Rabar Market Research, Inc.—Diversified . . . . . . . . . . . . . . . . . . . . . . . . . . . 366Sunrise Capital Partners LLC—Expanded Diversified . . . . . . . . . . . . . . . . . . 368Superfund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370Transtrend B.V.—Diversified Trend Program—Enhanced Risk (USD) . . . . . . 371Winton Capital Management Ltd—Diversified Winton Futures Fund . . . . . . 372Risk Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374C Short-Term Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375D Personality Traits of Successful Traders . . . . . . . . . . . . . . . . . . . . . . . 377E Trend Following Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381F Trading System Example from Mechanica . . . . . . . . . . . . . . . . . . . . . . 385System Background Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385System Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386A Canadian Dollar Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388System Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392G Critical Questions for Trading Systems . . . . . . . . . . . . . . . . . . . . . . . . 395Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Foreword“No good decision was ever made in a swivel chair.”—General George S. Patton, Jr.Larry HiteWhen I started trading in the commodity futures markets over35 years ago, the industry didn’t even have a name. Today, thebusiness has grown to the point where there are a myriad of waysto describe the funds that operate and their many styles ofinvesting. The particular discipline of trading that I practiced, evenbefore the nomenclature existed, is now plainly and aptly termed“trend following.” In fact, while I have seen many strategies comeand go, most of the other managers that I have known to surviveand thrive over the past few decades in global futures markets arealso trend followers. For having made my living as a trend follower,I’ve yet to come across a more compelling study, so clearly distilled,than has been offered by Michael Covel in Trend Following.I first met Michael Covel when he was working on this book. Iwas a little hesitant at first about sharing some of the rather simplesecrets of my trade. And, I didn’t make it easy on Covel. I startedinterviewing him on his investments and how he managed his risk.He quickly made me realize that he not only understood trendfollowing, but that he embraced it much like me. We delved into theroots of trend following and my investment strategies to explorewhy they work rather than just accepting the results. In readingTrend Following, I now see how well he was able to translate hisknowledge, and the perspectives of many of my colleagues, to paper.A large fraction of trafficaccidents are of the type“driver looked but failedto see.” Here, driverscollide with pedestriansin plain view, with carsdirectly in front of them,and even run into trains.That’s right—run intotrains, not the other wayaround. In such cases,information from theworld is entering thedriver’s eyes. But at somepoint along the way, thisinformation is lost,causing the driver to loseconnection with reality.They are looking, but theyare not seeing.Ronald A. Rensink
xivIt’s important to have aplan, remain disciplinedin executing that plan,and pay attention to whatis actually happeningrather than what youexpect to happen. We tryto be as objective aspossible in ouranalyses It’s not alwayseasy for people who areinvolved every day to staywith a plan whenmisfortune occurs for atime. You alwaysencounter the unexpectedand this can pushdiscipline right out of theway in the name ofprudence. But prudencealmost always dictatesstaying with theapproach that has madeyou successful. I see thatas one of my primaryroles. I often encourageeveryone during difficultdays to remain patient. Idon’t blame people for theunexpected.John W. HenryCME Magazine, Premier IssueTrend Following (Updated Edition): Learn to Make Millions in Up or Down MarketsBack in the 1970s, most of the guys I knew traded individualmarkets. The ones who traded wheat did not talk to the guys whotraded sugar. And, the guys who invested stocks did not care to talkto either one, because commodities were for “speculators” and not“investors.” Further, the bond crowd thought the stock guys werecowboys. Each group had developed its own superiority complexesand fundamentally believed that only industry experts like themcould understand the subtle dynamics of their markets. I guessthat’s part of the reason that no one cared much for trend followerslike me—I viewed every market the same way and each representednothing more than a trade to me. Today, for all the different facets,I believe everyone has come to speak the same language. It’s thelanguage of risk.In my early days, there was only one guy I knew who seemed tohave a winning track record year after year. This fellow’s name wasJack Boyd. Jack was also the only guy I knew who traded lots ofdifferent markets. If you followed any one of Jack’s trades, younever really knew how you were going to do. But, if you were likeme and actually counted all of his trades, you would have madeabout 20 percent a year. So, that got me more than a little curiousabout the idea of trading futures markets “across the board.”Although each individual market seemed risky, when you put themtogether, they tended to balance each other out and you were leftwith a nice return with less volatility.I could always see, after I got to Wall Street, how, for all theconfusion, markets were driven by people and their emotions. Thatwas what all of these markets had in common—people—and peoplejust don’t change. So, I set out to understand similarities in the waythat markets moved. When I added up Jack’s trades, only a few bigtrades made him all the money. For each of these big winners, I wasthere when “experts” told Jack that these markets couldn’t go anyhigher, but they did. Then, when I looked at Jack’s losses, theytended to be relatively small. Although it took me many years to putit all together—remember, there were no books like this backthen—these seemingly small observations became the foundationfor me of two important, intertwined investment themes: trendfollowing and risk management. Jack was not so much a trendfollower, but he did practice the first rule of trend following: Cutyour losers and let your winners run.
ForewordMost of the guys that I knew who lost a lot of money actuallytended to be more right than wrong. They just lost a lot on a few biglosers. I believe that people put too much of a premium on beingright. In some ways, it’s one of the drawbacks for people who wentto the best schools and always got straight As—they are too used toalways being right. It gets back to people and emotions. Everyone ishappy to take lots of little winners—it makes them feel good. Whentheir trades go against them, on the other hand, they hold onbecause they don’t want to accept being wrong. Many times, thesetrades come back and they are able to capture their small profit. Tome, that kind of trading is a little bit like picking up nickels in frontof a steamroller.Thankfully, the markets don’t care about me or you or wherewe went to school. They don’t care if you’re short or tall. I was neververy good in school and I wasn’t a good athlete either. With mybackground, the way I saw it, I never had any problem with the ideathat I could be wrong. So, I have always built in an assumption ofwrongness to anything that I do. We now kindly refer to thispractice as risk management, but I just wanted to answer thequestion: “What’s the worst thing that could happen to me?” I neverwanted to do anything that could kill me. Knowing that I was notlikely to be right that often, I had to trade in a way that would makeme a lot of money when I was right and not lose me a lot of moneywhen I was wrong. If that wasn’t enough, it also had to be simpleenough for me to understand.After many years of searching and learning things the hard way,I evolved my own version of trend following. The idea made senseand I had some good examples to follow. Still, I wanted to prove tomyself that it worked without betting real money. I had to test whatwould have happened had I traded that way in the past. These werethe early days of computers and we even had to “borrow” time onuniversity computers to test and prove our theories. It was apainstaking task, but it gave me the comfort that I needed. Now, inreading Trend Following, the do-it-yourselfers might argue thathaving a book that illustrates these same basic principles takessome of the fun out of it.Actually, Covel, like any good trend follower, has not focusedsolely on the endpoint. He gives you a deep understanding of themost important part: the path. Unlike so many other books thatxvA prudent investor’s bestsafeguard against riskis not retreat, butdiversification. [And]true diversification isdifficult to achieve by[simply] spreading aninvestment amongdifferent stocks (ordifferent equitymanagers), or even bymixing stocks and bonds,because the two are notcomplementary.David HardingWinton Capital
xvi[Trend following firm]Aspect Capital is aptlynamed. Its group ofphysics-trained leaderstook it from the aspectratio of plane design, thatis, the wider the wingspan, the more stable theplane. As such, Aspecttrades not only futures ofits early roots butEuropean equities, bondsand currencies in variousforms, covering a socalled wider wing span.The London-based hedgefund was the brainchildof Martin Lueck, EugeneLambert and AnthonyTodd. Founded in 1997,the principals wereinvolved in thedevelopment of AHL (nowowned by Man) with atrack record stretchingback to 1983. Aspect’sdisciplined approach hassuccessfully generatedreturns from both longsand shorts in difficultmarkets environments.Futures Magazine andAspect CapitalTrend Following (Updated Edition): Learn to Make Millions in Up or Down Marketshave been written about investing, Trend Following goes beyondthe results to explore the journey of this outstanding group oftraders.For my staff at Hite Capital, Covel’s Trend Following is requiredreading. For my daughters at home, it has finally settled thequestion I seemed never to have been able to clearly answer myself,“Daddy, what do you do for a living?” This book captures andconveys what so many traders have taken careers and large lossesto learn. And lucky for all of us, you don’t have to be Phi Beta Kappato understand it.We no longer live in that world of wheat guys, sugar guys, andstock guys. Trend following trading is an important force in everymarket and should be a part of any diverse investment portfolio. Forme, the discipline of trend following goes beyond trading andmoney manageme
"Please read [Trend Following] whether you think you have an interest in trend following or are not sure Covel has hit a home run with it." —Gail Osten, editor-in-chief, Stocks, Futures, & Options magazine "Michael Covel has written the definitive book on trend following. With careful
All Crashes - 10 Years There is a downward trend for all crashes over the last ten years. Trend line R² -0.89 The strength of the trend is expressed through the R2 value. The closer the R2 value is to 1 or -1 the stronger the trend. Positive R 2values indicate an upward trend, negative Rvalues indicate a downward trend, and zero indicates a flat trend.
"Michael Covel's Trend Following: Essential." —Ed Seyk ota, pro!led in Market Wizards "Trend Following by Michael Covel? I'm long this book ." —Bob Spear, Mechanica "[Trend Following] did a superb job of covering the philosophy and think ing behind trend following (basically, why it work s). You might call it the Market Wizards of
"Please read [Trend Following] whether you think you have an interest in trend following or are not sure Covel has hit a home run with it." —Gail Osten, editor-in-chief, Stocks, Futures, & Options magazine "Michael Covel has written the definitive book on trend following. With careful
Since 1996 Michael Covel has provided top of the line trend trading systems and education to thousands in 70 countries." My research firm Trend Following is pleased to announce two additional trend following systems. These are stand-alone trend following trading systems that each tackle great trend following trading from a different .
Two Styles of Trading With-Trend Seeks to enter a position in alignment with the preexisting trend, or at the beginning of a new trend. Common structures are pullbacks and breakouts. Ideal entries are often around "centers". Counter Trend Looks to take positions against the current dominant trend on the trading timeframe.
RP 2K, Second Edition RP 2L, Third Edition RP 2M, First Edition Bul 2N, First Edition RP 2P, Second Edition RP 2Q, Second Edition RP 2R, First Edition RP 2T, First Edition Bul 2U, First Edition Bul 2V, First Edition Spec 2W, First Edition RP 2X, First Edition, with Supp 1 Spec 2Y, First Edition
about trend following and what is wrongabout conventional trading approaches." —Jack Schwager, Author of Market Wizardsand Schwager on Futuresseries "Michael Covel's Trend Commandmentsis full of practical wisdom in bite-size portions on the benefits of trend trading—written in a straightforward storytelling format.
Introduction to Groups, Rings and Fields HT and TT 2011 H. A. Priestley 0. Familiar algebraic systems: review and a look ahead. GRF is an ALGEBRA course, and specifically a course about algebraic structures. This introduc-tory section revisits ideas met in the early part of Analysis I and in Linear Algebra I, to set the scene and provide motivation. 0.1 Familiar number systems Consider the .
