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Covel Article

Trend Following | May 20th, 2008

A recent article published in Australia’s Compare Shares.

What Others Think

Matt - Trading System Reviews Added:

May 20th, 2008 at 10:16 pm

This is a really good article - much as I thought your books were great, they always had a slightly evangelical feel to them, almost wilfully antagonizing anyone with anything of a fundamental approach.
I have long used a fundamental filter (RoE, Sales Growth etc) to determine the companies that are, for want of a better term, ‘good’ and those that are ‘bad’. I then wait for a trend to develop in the relevant direction - long for ‘good’ stocks and vice versa - get in and hold until the trend breaks.
I’ve been using this pretty successfully for about 7 years (not the longest track record but still) and the filter has added a considerable amount to the returns when I have tested it against the same system without the filter.
Up until I read this I thought your ‘pure’ approach to trend following would consider this (once again for want of a better term) ‘wrong’ but having read this is seems our views are actually pretty close - reaction versus prediction, statistically proven etc.
So thanks for the clarification, it’s always nice to find your thoughts aren’t quite so far removed from people with intelligent opinion and a disdain for the financial media!
Matt

Ken - Todays Breakout Stocks Added:

May 25th, 2008 at 11:53 pm

I used to use some fundamental analysis in my trading too. But then I realized that stocks with good fundamentals usually had good price trends anyway so there was really no need for the fundamentals part. I could often predict the fundamentals just by looking at the price trends!

Matt - Trading System Reviews Added:

May 29th, 2008 at 10:03 pm

Yeah, that is true, but I also found that the good/bad fundamentals filter tended to keep the trends going in the right direction for longer so giving a better overall result. The other big advantage is that the filter means I usually only have about 30-40 stocks to keep an eye on, which saves me a huge amount of time!

Matt - Trading System Reviews Added:

May 29th, 2008 at 10:05 pm

I’ve just read that back and realized it wasn’t very clear - what I was trying to say was the stocks that passed the filter tended to have trends that lasted longer than those that had the same trends in place but did not make it through the filter.

Ken - Todays Breakout Stocks Added:

May 30th, 2008 at 2:03 am

Maybe the trends were longer but were they stronger? When it comes to making money the strength of the trend is more important than the length of the trend. I’d much rather own a stock that goes up 50%/yr for 2 yrs. than one that goes up 10%/yr for 5yrs. The strongest trends actually occur during bubble periods. If you are using a fundamentals filter then you would completely miss out on those.

What do you think?

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