Michael Covel’s Official Site

Some feedback about a recent post:

Hi Mike, I just read your “The Elephant in the Room” post. He didn’t grasp the concept AT ALL…People love to predict. People love to be right. People love to hang on to the past. People love to control EVERYTHING. You see it everywhere. Not just in the market. People lose their loved ones/make mistakes and they live with guilt and regret and hang on to it forever. People think they can control certain things, but it turns out they can’t. People hang onto losing relationships for years. That’s human nature. Trend following teaches that this is NOT the way. Because if we do this way, we simply live in pain forever, everyday, every second. And why choose to live in pain? We have two choices everyday when we roll out of bed, live in pain or live in happiness. I would like to live in happiness thank you…’Trend’ does not exist. It ONLY exists in hindsight on the chart, Trend followers do NOT follow trend. “Following trend” has the smell of prediction in it. Trend followers simply just follow “the present”. We buy because the market is going up NOW. We sell because the market is dropping NOW. We have NO IDEA if it will keep rising the next second. We simply don’t care! We don’t need to care because of money management strategies and “homework” on system design and back testing, etc. We should live our lives in the same way. There is only present. There is no past. The past is gone, and the future hasn’t happened yet. You can make love to your wife tonight, but that doesn’t mean she won’t divorce you the next morning. You lost your loved ones in the past, but that doesn’t mean you can’t find a happier way to live now.”

I came across the list below from ‘Craig’ here. It is a great list:

Top 10 Ways To Lose All The Money In Your Trading Account In 30 Days Or Less - Guaranteed!

#1 - Absolutely, without a doubt, FORGET about managing your money. Don’t worry about how much you can lose on a trade. Only think about how much loot your gonna make. Then start planning that trip to Fiji!

A good piece of insight recently shared with me from an old pro with 30 years trading experience:

“I guess most readers are familiar on some level with the sport of hunting. I am sometimes amused by the new outdoor channels portrayal of the sport of hunting. Jackie Bushman has a nationally syndicated show from Alabama that weekly portrays the harvesting of trophy bucks. A buck is a male deer for you who are somewhat challenged in the sport of hunting. Almost every week a trophy animal is harvested on the Bushman show. To the novice deer hunting appears to be simple and effortless. Of course what the cameras and most certainly the promoters never reveal is the countless hours of scouting for trophy deer that go into the eventual production of the show. So what’s my point and how does all this relate to trading. Sometimes in trading there just aren’t many trophies to be found - a trophy in the sense being a trending market. These times separate the great traders from the not so great traders. Over my 30 plus year career I have witnessed numerous “times like these”. The good news is that they don’t last forever and my bet is things are about to change. Trend followers have had a pretty tough time lately but tough times don’t last but tough people do. The next question I often receive is “where is the next great trading opportunity?” Not to be a wise ass but if I really knew that I probably would not be sending this to you today. Well I might because this is fun for me and I hope educational for you. I enjoy teaching almost as much as trading. Trust me on this there are some very big trades coming and with hard work and patience you can catch them just like a real trophy deer hunter does.”

Don’t take his last sentence as a prediction, it’s not. He is simply pointing out the reality of trends.

A reader forwarded this to me today:

Over the next 1 to 3 years the macro fundamental forces driving global currency markets are unlikely to alter significantly. We really are in a 10-15 year period, that started 7 years ago, of a shift in global investment perceptions away from being U.S. centric to being more balanced globally. At the same time, and to some extent related to global portfolio reweightings, sustained and strong economic growth is becoming more widespread. China and India are the much quoted examples, but the phenomenon is more general. As these once disparate and U.S. centric for exports economies continue to grow, they are doing more and more trade with each other. Gradually the rest of the world is moving away from its dependence on the U.S. This process has several decades to go, but markets tend to pre-empt, hence the U.S. dollar is already well on its way lower. In this environment any high yielding currency is going to do well, especially if it is the major financial center. Therefore a 2-3 year forecast for Sterling to be touching 2.2000 is not unreasonable.

Not trying to be a downer or crank. But I do find it instructive for those folks unfamiliar with trading to read ‘not what to think’.

The feedback below is from an old pro trader. The excerpts he sent and his feedback about those excerpts are listed. As an FYI, he knows Jones, hence the lack of formality:

***

Hi Michael, I thought it important to share some conclusions i have been able to reach from my latest batch of newsletters and research in a few markets I follow [that came across my desk].

U.S. stocks: “We remain long term bearish but short term friendly” to this ongoing developing trend. “If the market goes below 11130 basis the cash dow it is going down otherwise it could easily rally to 11400 or maybe even 11700.”

Boy is that some good insight.

Sugar: “We remain committed to the bull camp in october sugar and are currently looking for a place to ad to our existing long position at 16.42. Some october calls are reaching extremely low prices.”

No shit sherlock! What did Paul say about “losers averaging losers”?

And finally my favorite: “Risk management is the most over rated ingredient in successful trading. We never recommend risking more than 25% of one’s trading capital per trade. Great traders just know when to step on the gas.”

From Yahoo Finance (CBS Marketwatch) tonight comes the eye catching title “Stocks may face a dreary decade ahead” (PDF). Whether this author is right or wrong, 19 years from now…who cares? No one with an ounce of sanity would use this article as a guide for anything. I would advise anyone who wants to play games with statistics, to actually play a game designed to deal with whatever eventuality comes down the pike…and forget predictions. That will require a more honest statistical thinking.

J.T. McPherson sent me in the following article in 3 parts:

Part 1
Part 2
Part 3

His hand written notes are just the types of questions I would ask!

While doing some research at the US Library of Congress for a new book, I came across this ad (PDF) and others. That ad is straight from Commodities Magazine (now Futures) circa 1977 or so.

Also, this one from 1978 (PDF), about what you can do with a ‘computer’, is a blast from the past.

I met Ajay Jani at a Superfund event in early summer. Ajay, who is not affiliated with Superfund, trades out of NYC and passed along to me tonight a recent debate he had:

Michael, I thought you’d get a kick out of this story. I was having a discussion with a dyed-in-the wool fundamentalist. No amount of information regarding the merits of trend-following or the examples of success using the strategy would sway this person from the view that nothing matters except the fundamentals. Eventually he brought out the old chestnut:

At that point, he gave up and shrugged, though I’m still not sure he’s convinced! Best, Ajay

I was talking the other day with an old pro trader about the comparison of independent minded traders, like the trend followers mentioned in my book, to in-house traders at the likes of a Goldman Sachs. His comment:

“The lack of accountability for the in-house traders [is hard]. Their mess-ups are hidden in the rest of the pile. My track record was there for everyone to see…the institutional guys make a lot of noise when they hit but their mini crashes never make the news. I have always felt on some level the big guys let you know what they are doing or actually have done when it supports their market position. CTA’s [trend followers] are really under the microscope every day performance wise and I am sure in house traders have supervisors that watch them but psychologically I think they are world’s apart.”