Jim Rohrbach writes:

This last week has been about as wild as I have ever seen. The market gave us very solid Sell Signals and then it gave us a couple of strong up days. I don’t know what caused the up days. I read that it had something to do with the European actions to reduce debt, but we have been hearing this stuff for over a year now. I listen to Larry Kudlow some times and last night he said he is about to give up on trying to figure out what is going on in Europe. I gave up on trying to figure out the debt crisis. I listen to the RIX [his trend indicator], but I must admit that the wild swings in the RIX are very frustrating. But I will play every Buy and Sell Signal knowing that the market will resolve this whipsaw phase and give us either a major up move or a major decline. I really don’t care which way it goes, as long as the market has a sustained move.

Nice Jim.

Ben Stein recently said:

“Human beings are not that nice. You don’t want to have to rely upon them for survival in your old age. You want to rely on money. Money is sometimes cruel, sometimes nice, but don’t try to rely on people. Rely on what you’ve got saved up.”

I might disagree with Stein on strategy, but wise point there.

From FT.com:

The financial crisis is a direct result of their hubris and blind faith in their models, he says, with noticeable anger. The efficient markets hypothesis is, says Mr. Harding “a religion … Facts are not relevant to these people”.

Harding is featured in my book The Little Book of Trading.

Seize the moment. It is time for massive economic challenge, political and generational change–whether you want it or not.

What will you do? Trust the old ways. Hold on. Pray.

Those are not solutions.

Seth Godin adds:

That’s a question you hear a lot. “Was it worth it?” Not certain what either “it” refers to, but generally we’re saying, “was the destination worth the journey? Was the effort worth the reward?” The thing about effort is that effort is its own reward if you allow it to be. So the answer can always be “yes” if you let it.

Seize the moment.

Blogger Robert Weinstein reviews my book The Little Book of Trading:

Just when you may have started to believe it was safe to fade or dollar average a losing position, Mike Covel provides big reasons not to in his latest must read trading book “The Little Book of Trading: Trend Following Strategy for Big Winnings” by Wiley publishing. If I am truly honest, I have to admit I opened this book up with high expectations. I own other books written by Mike Covel including “The Complete TurtleTrader” and “Trend Following”. After all, I have read “turtle” and “trend” cover to cover more than once and most trading books I don’t even complete once.

Covel is able to articulate the emotions, trials, triumphs and most importantly the land minds waiting to blow up trading accounts. Covel’s rare genius of the pen is undoubtedly what many other authors hope to achieve when developing trading improvement books. In the little book, Covel brings the wisdom of many great traders and in a way that doesn’t require three solid days of reading. I picked up and read a chapter here and there and before I knew it, the book was done and I was finding myself reading again the pages I dog-eared (and I have a lot of pages marked). It’s hard to miss when you have names like Ed Seykota (one of the greatest traders ever on many levels), Larry Hite, Kevin Bruce, and many others. The biggest downside of The Little Book Of Trading is it ends near the 200 page mark. I would have been more than happy to keep reading upon reaching the last page. As someone who reads stock articles for hours a day, I really connected with the chapter titled “Stories Don’t Make You Money”, and I have to fully agree. Most of what I read is simply worthless at best, but at least normally transparent in their motivation. Covel writes “…And the demand is there. People want to understand so badly, and stories help to rationalize. It’s comfort food for the financial soul”, and this is so dead on. I have written negative articles about several stocks on seeking alpha causing a wave of angry comments that included all the reasons they read why “it was going to keep going up”, or “keep going down”. I have largely given up trying to explain everything they know is priced in and once the emotion leaves (think lady luck) as it always does, rational pricing takes over.

Covel wrote in chapter 5 titled “Think Like A Poker Player And Play The Odds” and this chapter alone has more required information than many complete books in regards to the mental aptitude, fortitude, and preparation required to succeed in the markets. “If you’re playing a positive expectation game, you don’t want to be knocked out. Good stuff always takes care of itself, but you have to stay alive. You can’t play if you’re dead”. This is such an important point, and I see the KIA’s of the trading battlefield all the time. I have been in the same chat room for almost every trading day for the past four years and on a regular basis for about 10 years. The warning signs are everywhere and usually the same. Traders put up large numbers, both winners and losers relative to their account. Then, like clockwork, a big fast moving stock captures everyone’s attention (not just the chat room but usually all of Wall St.) and the only sound before the explosion is the click of a keyboard. Unlike real KIA’s, many of the trading blow ups actually speak afterward. The focus on how much can be made instead of how much they can lose is the driving forces of every trading account implosion. Covel says it so well with the fact that even if you know ahead of time what an investment will do, it’s not enough information to maximize the return on investment. If you leverage up to far, you likely to get killed as the market zigzags its way to the ultimate price.

Timing is also vital and Covel covers this topic splendidly with tactics that do NOT include using judgment calls while in a trade. In a nutshell, when you are truly trend trading, you are always exiting when a trade is moving against you, and never trying to guess when the price is “too high / too low” or “has to come back some”. What really gives this “little book” and trend trading in general is greatest power is the ability to formulate a road map and plan of attack, which removes the thinking while in the trade. Removing the decision making while in “the fog of war” allows the trader to focus on becoming better instead of trying to predict the future.

I opened up Michael Covel’s latest book with high expectations, and once again I have finished reading regenerated and mentally more prepared to start my trading day tomorrow. Interestingly enough, I am not a trend follower, not at least in the sense of what most consider trend following. Nonetheless I gained a great deal of value by reading the book and so I am very confident you will also. Get a copy of this book, its mandatory reading if you want to know as much as you can about trading. You will very quickly understand why I say you don’t buy a Covel book; you invest in your trading knowledge.

I do not get paid to review or for sales of books I write about.

Always nice to know someone enjoys my work!

I put this great quote in my bestseller Trend Following:

“What is striking is that the leading thinkers across varied fields–including horse betting, casino gambling, and investing–all emphasize the same point. We call it the Babe Ruth effect: even though Ruth struck out a lot, he was one of baseball’s greatest hitters.”

Get it? You have to get it–to survive. Ever hear political leaders talk like this? No, political leaders promote the nonsense that there will never be a stubbed toe again. Believe that?

Let me give an example about sticking with it. The biggest crises Paul Mulvaney had was during July and August 2007, where he had his two biggest down months consecutively. A 42 percent drawdown was the result. In the aftermath he went back and reexamined everything. He examined every possible misstep, considered all assumptions, but in the end concluded that the system was valid. One of the tests performed in the aftermath was rerunning his trading results against a whole range of different levels of leverage. Mulvaney is notorious for man- aging his leverage–even if he uses a lot of it. However, Mulvaney objectively asked what would have happened if he traded with more or less leverage than he actually used? He discovered that had he used lower leverage he would have actually generated a bigger drawdown (read: bigger loss) during the crisis. That seems intuitive, does it? Hold your judgment. When his account finally bottomed in August 2007 at the depths of a 42 percent drop, a new gold position kicked in and started making money. By the end of August, he had made new money and had crawled away from the low of his drawdown. At a lower level of leverage, theoretically, he would have captured a smaller recovery from those new gold positions that were kicking in, and actually his system would have taken a slightly larger maximum drawdown.

I just saved you and made you a fortune.

Source: The Little Book of Trading

My book on the Turtles serves up lessons that never go stale. An excerpt:

People were willing to do just about anything to get Dennis’s attention [to get hired as one of his student traders]. Of all the approaches his students took to get themselves admitted to his trading school, Jim Melnick’s was the most extreme and inventive. He was an overweight, working-class guy from Boston who was living over a saloon in the Chicago suburbs. However, Melnick was determined to get as close to Dennis as possible. He actually moved to Chicago just because he’d heard about Richard Dennis. He ended up as a security guard for the Chicago Board of Trade and every morning would say, “Good morning, Mr. Dennis” as Dennis entered the building. Then, boom, the ad came out and Melnick got selected. Dennis, who was loaded with millions and power, took a guy off the street and gave him the opportunity to start a new life. The story of Melnick is pure rags-to-riches. How did he know that getting that close to Dennis could lead to something? He didn’t, of course, but he hoped it would. His self-confidence was prophetic. Another of Dennis’s students described Jim’s “everyman” qualities: “He reminded me of a truck driver and like magic became a ‘Turtle’ and he still couldn’t believe why or how…as far as where he is today, I have no clue at all.” Mike Shannon, a former actor who had left school at the age of sixteen, made it to Dennis’s door, too. He recalled, “I was working as a broker, and I was a very bad commodity broker.” Through a bunch of floor brokers Shannon found out about the ad, but he knew his résumé was problematic. He had a solution to that: “I made up a phony résumé, and I sent it off to Richard Dennis. I used the school of audacity to get the job.” People get fired or, at the very least, don’t get hired because of falsifying a résumé, but that was not how it worked with the eccentric head of C&D Commodities.

Nice.

You can make your first million—and that is the hard number. Anyone can do it. Of course, billions, and degrees of billions, require some luck. However, an educated person, no matter how they get their education, can indeed saddle up to their iPad and make a small fortune. To say otherwise is disingenuous. The world has changed. The game is different. If you are sitting around waiting for a job to magically appear, or if you are listening to talking heads rambling on about politicians creating jobs, or worse yet, you think China is the enemy to your wealth creation, it has to be asked: “Are you a masochist?” There is another game to play. Trend following trading is that game, but it is terribly important to avoid becoming the game–a game I have explained in a multitude of ways. So think about the three types of players in any game:

• Those who know they are in the game.
• Those who do not know they are in the game.
• Those who do not know they are in the game and have become the game.

Within a half hour of playing any game, if you do not know the patsy, you are it. Said another way: You are the game. That is serious talk for the serious game of your financial health and wealth.

Excerpt: Trend Commandments

The weekend reads read like “the end”:

Dow, S&P Log Worst Thanksgiving Week Since 1932
Britain’s Foreign Office Prepares For Riots In Europe; Sees Euro Collapse “When, Not If”
Woman Pepper Sprays Shoppers To Get Xbox
Why We Spend, Why They Save
The 5 Most Important Global Political Trends to Watch in 2012
Fire the Janitor

The financial world is a fearful place these days, but trading off that (read: the fundamentals) is not a path to riches. Remember, Morrison found his end unnaturally early:

Richard Russell writes:

At the La Jolla Rehab Center, I still read 10 papers and maybe 25 magazines every week, and let’s be honest. The news is so confusing that it is absolutely impossible to come to any sort of intelligible conclusion. I’m embarrassed to say that for the first time in six decades I don’t really know what’s going on. The Dow, the last few months has traveled thousands of points and ended up nowhere — actually as of yesterday’s close the Dow and the S&P were down for the year showing net losses for all the frantic activity. My advice, is to stay with gold, some cash, and Permanent Portfolio (PRPFX). I also think silver is particularly interesting here, and I advise the purchase of 10 oz silver bars. Buy them and pile them up in your bank vault.

The news is always confusing. That is simply not a new phenomena.

Russell has some great thoughts, but sometimes he mixes in views that dramatically confuse sound trend trading principles. Internal consistency is absolutely key for survival.

From the wires:

Shares of Netflix, Inc. (NFLX) hit a new 52-week low on Monday. The stock traded as low as $73.26 during mid-day trading and last traded at $73.85. The stock previously closed at $78.06. It has a 52 week high of $304.79.

Some very smart people bought into the Netflix story (just like 1998-99). Remember, exit strategies are for the feeble. It always feels better to hold on as a stock heads to zero. Who cares if it comes back! Heavy sarcasm.