Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets

Paperback | February 15, 2009

byMichael W. Covel

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Michael Covel is the author of five books: including the international bestseller, Trend Following and his investigative narrative, The Complete TurtleTrader. Fascinated by traders that quietly generate spectacular returns, those going against the grain of investment orthodoxy, he has uncovered astonishing insights about how they think, strategize and execute their systems.

 

His cutting-edge and unorthodox perspectives have garnered international acclaim and have earned him invitations with: China Asset Management Co., Ltd., GIC Private Limited (Singapore sovereign wealth fund), BM&F Bovespa, Managed Funds Association, Bank of China Investment Management, Market Technicians Association. He also has the distinction of interviewing four Nobel Prize winners in economics, including Daniel Kahneman and Harry Markowitz and has been featured by major press, including: The Wall Street Journal, Bloomberg, CCTV, The Straits Times and Fox Business.

 

Covel’s Trend Following Podcast now has over 2.5M listens (trendfollowing.com/podcast) and has ranked as high as #2 on iTunes. He splits his time across USA and Asia and sees location independence as our future.

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From the Publisher

Michael Covel is the author of five books: including the international bestseller, Trend Following and his investigative narrative, The Complete TurtleTrader. Fascinated by traders that quietly generate spectacular returns, those going against the grain of investment orthodoxy, he has uncovered astonishing insights about how they think...

From the Jacket

Today, you need trend following more than ever. Read this bestselling book, and put it to work for you!  Real proof, real data, real results Includes over a decade of detailed performance charts All the Information You Need...in One Number Why the market price still tells you all you need to know to trade--and always will--...

Discover the investment strategy that works in any market. The one strategy that works in up and down markets, good times and bad.   ¿Trend Following¿ has become the classic trading book ¿ accepted by the great pro traders as their standard..  Learn how Trend Followers delivered fantastic returns while everyone else was losing t...

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Format:PaperbackDimensions:464 pages, 9.1 × 7 × 1.1 inPublished:February 15, 2009Publisher:Pearson EducationLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:013702018X

ISBN - 13:9780137020188

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Customer Reviews of Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets

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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 the essence of what really makes markets tick. Diligently researched and comprehensive in scope, it will replace The Market Wizards as the must-read bible for a new generation of traders.” —Jonathan Hoenig, portfolio manager, Capitalistpig Hedge Fund LLC and Fox News contributor “Investment books that have a lasting appeal offer insight that resonates with a large number of investors. We believe Michael Covel’s Trend Following will be such a book.” —Richard E. Cripps, Legg Mason chief market strategist “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 research and clear insight, he has captured the essence of the most successful of all trading strategies. Michael knows his subject matter and he writes about it with passion, conviction, and enthusiasm. This enjoyable and well written book is destined to become a classic.” —Charles LeBeau, author of Technical Traders Guide to Computer Analysis of the Futures Markets “Trend Following is an engrossing and educational journey through the principles, pitfalls, players, and psychology of aggressive technical trading of the investment markets. It is rich in its wisdom and historical study.” —Gerald Appel, president of Signalert Corporation and publisher of Systems and Forecasts newsletter “Conventional wisdom says buy low and sell high, but what do you do now that your favorite market—be it a stock, bond, or commodity—is at an all-time high or low? For a completely different perspective, from people who actually make money at this business, take a look inside. Michael Covel has written a timely 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 in numerous books including The New Market Wizards “I think the book did a superb job of covering the philosophy and thinking behind trend following (basically, why it works). You might call it the Market Wizards of Trend Following.” —Van K. Tharp, Ph.D., president, International Institute of Trading Mastery, Inc. Van was originally profiled in The Market Wizards by Jack Schwager. “I think that this book documents a great deal of what has made trend following managers a successful part of the money management landscape (how they manage risk and investment psychology). It serves as a strong educational justification on why investors should consider using trend following 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 Wizards by Jack Schwager. “Michael Covel mixes a unique blend of trend following matters with the thoughts and quotes of successful traders, investors and society’s leaders. This is a valuable contribution and some of the best writing on trend following I’ve seen.” —Robert (Bucky) Isaacson, managed money and trend following pioneer for more than 30 years “Trend Following: Definitely required reading for the aspiring trader.” —David S. Druz, tactical investment management and trend follower for 25 years “Michael Covel reveals the real secret about trading—that there is no secret. His points are peppered with wisdom from experts across the industry.” —John Ehlers, president, MESA Software Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets Preface “Men wanted for hazardous journey. Small wages. Bitter cold. Long months of complete darkness. Constant danger. Safe return doubtful. Honor and recognition in case of success.”1 This book is the result of a 14-year “hazardous journey” for the truth about trend following trading. It fills a void in a marketplace inundated with books about buying low and selling high, index investing, and all other types of fundamental analysis, but lacking any resource or, for that matter, practically any reference to what I believe is the single best strategy to consistently make money in the markets. That strategy is known as trend following. Author Van Tharp has described it succinctly: “Let’s break down the term ‘trend following’ into its components. The first part is ‘trend.’ Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices ... ‘following’ is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then ‘follow’ it.”2 When it is a question of money, everyone is of the same religion. Voltaire Trend following trading seeks to capture the majority of a market trend, up or down, for profit. It aims for profits in all major asset classes—stocks, bonds, currencies, and commodities. Unfortunately, however simple the basic concepts about trend following are, they have been widely misunderstood by the public. My desire to correct this state of affairs is what, in part, launched my research. I wanted to be as objective as possible, so I based my writing on all available data: Trend followers’ month-by-month performance histories Trend followers’ published words and comments over the last 30 years News accounts of financial disasters News accounts of the losers in those financial disasters Charts of markets traded by trend followers Charts of markets traded by losers in the financial disasters If I could have written a book comprising only numbers, charts, and graphs of trend following performance data, I would have. However, without any explanation, few readers would have appreciated the ramifications of what the data alone showed. Therefore, my approach to writing Trend Following became similar to the one Jim Collins describes in his book Good to Great, in which a team of researchers generated questions, accumulated data in their open-ended search for answers, and then energetically debated it. Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. The schools are not nurseries of progress and improvement, but conservatories of tradition and unvarying modes of thought. Ludwig von Mises However, unlike Collins who was writing about generally well known public companies, trend followers form a sort of underground network of relatively unknown traders who, except for an occasional article, the mainstream press has virtually ignored. What I have attempted to do is lift the veil, for the first time, on who these enormously successful traders are, how they trade, and what is to be learned from their approach to trading that we might all apply to our own portfolios. Trend Following challenges much of the conventional wisdom about successful trading and traders. To avoid the influences of conventional wisdom, I was determined to avoid being influenced by institutionalized knowledge defined by Wall Street and was adamant about fighting “flat earth” thinking. During my research, starting with an assumption and then finding data to support it was avoided. Instead, questions were asked and then, objectively, doggedly, and slowly, answers were revealed. If there was one factor that motivated me to work in this manner, it was simple curiosity. The more I uncovered about trend followers, the more I wanted to know. For example, one of the earliest questions (without an answer already) was learning who profited when Barings Bank collapsed. My research unearthed a connection between Barings Bank and trend follower John W. Henry (now the majority owner of the Boston Red Sox). Henry’s track record generated new questions, such as, “How did he discover trend following in the first place?” and “Has his approach changed in any significant way in the past 30 years?” I was also curious about who won the $1.9 billion hedge fund Long Term Capital Management lost during the summer of 1998. Why did the biggest banks on Wall Street invest $100 billion in an options pricing model with so much inherent risk? Further, considering what mutual fund and hedge fund managers lost during October 2008 and what successful trend followers earned during the same time, I could not understand why so few investors were oblivious to even the existence of trend following trading. Other questions quickly appeared: How do trend followers win in the zero-sum game of trading? Why has trend following been the most profitable style of trading? What is the philosophical framework of trend followers’ success? What are the timeless principles of trend following trading? What are trend followers’ worldview of market behavior? What are the reasons why trend following is enduring? The important thing in science is not so much to obtain new facts as to discover new ways of thinking about them. Sir William Bragg Many of the trend followers studied are reclusive and extremely low key. Some discovered trend following on their own and used it to make their fortunes out of home offices. Bill Dunn, a successful trend follower who has beaten the markets for over 30 years, works out of a quiet, Spartan office in a Florida coastal town. For Wall Street, this approach to trading is tantamount to sacrilege. It goes against all the customs, rituals, trappings, and myths we have grown accustomed to with Wall Street success. In fact, it is my hope that my profiles of trend followers will correct the public’s misconception of a successful trader as a harried, intense workaholic who spends 24/7 in the labyrinth of a Wall Street trading firm, surrounded by monitors and screaming into a phone. When the first edition of Trend Following hit the streets in April 2004 I hoped to assemble the first comprehensive look at trend following trading. Almost five years since initial publication, that goal was realized. How do I know? Since the first edition of Trend Following, I have met literally dozens of trend following traders managing collectively billions upon billions of dollars. Their feedback has been the validation. I never would have expected that an obscure book put together five years ago would lead me to having conversations with the likes of Nobel Prize winner Harry Markowitz and hedge fund managers Boone Pickens and David Harding, but it did. Validation aside, October and November 2008 made me want another bite at the apple, another chance to “work” on this book. And lucky for me, the 2008 market chaos gave me that window. There is no doubt that October and November 2008 were the most historic market months since the Great Depression. Most people, most mutual funds, and most hedge funds lost unimaginable sums of money. It has long been said that “genius is leverage in a rising market,” and when the bubble popped in 2008 clearly people who had long been positioned as genius weren’t that smart after all. Already guessed where I am headed with this rant? Yes, while the rest of the world got creamed in 2008, trend followers made fortunes. Performance numbers for top trend following traders for October 2008 alone ranged from +5 percent to +40 percent. Making that much in one month when much of the rest of the world was losing big time is noteworthy to say the least. My publisher Jim Boyd agreed with me. This new edition of Trend Following includes many new sections and insights, surrounding the same core timeless lessons from the first edition. I updated the book throughout and worked to make material accessible and interesting enough so it might give an occasional “aha” experience. However, if you’re looking for trading “secrets,” you need to look elsewhere. There is no such thing. If you’re in the mood for stories about what it’s like inside a typical Wall Street firm (at least in those firms before they all went under in 2008!) or how greedy traders sow the seeds of their own destruction, your needs will not be met with my writing. But if you are looking for something different, looking for something to fill a void in your understanding of how big returns are actually made year after year, but didn’t know where to turn for honest information, I hope my insights give you the confidence that ultimately helps you to make some big money. Fish see the bait, but not the hook; men see the profit, but not the peril. Chinese proverb To be aware how fruitful the playful mood can be is to be immune to the propaganda of the alienated, which extols resentment as a fuel of achievement. Eric Hoffer © Copyright Pearson Education. All rights reserved.

Table of Contents

Foreword by Larry Hite     xiii

Preface     xvii

Part I

1          Trend Following     3

2          Great Trend Followers     27

Part II

3          Performance Data     97

4          Big Events, Crashes, and Panics     123

5          Baseball: Thinking Outside the Batter's Box     181

Part III

6          Human Behavior     193

7          Decision Making     211

8          Science of Trading     221

9          Holy Grails     231

Part IV

10        Trading Systems     247

11        The Game     277

Afterword     285

Foreword to the First Edition by Charles Faulkner     299

Appendices

Introduction to Appendices     305

A          Trend Following for Stocks     307

B          Performance Guide     347

C         Short-Term Trading     375

D         Personality Traits of Successful Traders     377

E          Trend Following Models     381

F          Trading System Example from Mechanica     385

G         Critical Questions for Trading Systems     395

Resources     397

Endnotes     399

Bibliography     423

Index     431

Editorial Reviews

“Michael Covel’s Trend Following: Essential.” --Ed Seykota, trend follower for 35 years and original Market Wizard   "For my staff, Michael Covel's Trend Following is required reading." Larry Hite CEO, ISAM, Originally profiled in The Market Wizards by Jack Schwager   "My favorite of the new TA [technical analysis] books is 'Trend Following' by Michael Covel. Straightforward, easy to read, this book is rich in details about why trend following is such a successful strategy amongst some of the world's best-performing hedge funds." Barry Ritholtz, The Big Picture   “A mandatory reference for anyone serious about alternative investments.” --Jon Sundt, president and CEO, Altergris   "I think that Michael's Trend Following is an outstanding read from which all investors can learn to trade markets better by limiting their risks and maximizing their profits through a more disciplined approach to investments." Marc Faber Managing Director, Marc Faber Limited Editor, Gloom, Boom & Doom Report   "I think the book did a superb job of covering the philosophy and thinking behind trend following (basically why it works). You might call it the Market Wizards of Trend Following." Van K. Tharp, Ph.D. Author of Trade Your Way to Financial Freedom   "Michael Covel does an excellent job of educating his readers about the little-known opportunities available to them through one of the proven best hedge fund strategies. This book is like gold to any smart investor." Christian Baha Superfund   "Michael Covel's book is the definitive guide to trend trading. Backed by real world results from some of the biggest and best money managers in the United States, his book will put you on the path to successful trend trading." Larry Connors TradingMarkets.com   "Michael Covel's Trend Following is a breakthrough book that captures the essence of what really makes markets tick. Diligently researched and comprehensive in scope, it will replace Market Wizards as the must-read bible for a new generation of traders." Jonathan Hoenig Fox News Contributor   "Trend Following: Definitely required reading for the aspiring trader." David S. Druz Tactical Investment Management   "I think that this book documents a great deal of what has made Trend Following Managers a successful part of the money management landscape (how they manage risk and investment psychology). It serves as a strong educational justification on why investors should consider using Trend Following Managers as a part of an overall portfolio strategy." Tom Basso Originally profiled in The New Market Wizards