Michael Covel is the author of the internationally bestselling book Trend Following

Hedgestreet & Event Based Markets

December 30, 2004

Some good updates on Hedgestreet and event based trading instruments:

Crude Oil Added at Hedgestreet

Audio Panel at Futures Industry Association (Real format)

Bertrand Russell Wisdom

December 29, 2004

"What a man believes upon grossly insufficient evidence is an index into his desires -- desires of which he himself is often unconscious. If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence. The origin of myths is explained in this way."
Bertrand Russell

The Need for Attention to See Change

December 27, 2004

What's the Difference between Looking and Seeing?

"A large fraction of traffic accidents are of the type "driver looked but failed to see". Here, drivers collide with pedestrians in plain view, with cars directly in front of them (the classic "rear-ender"), and even run into trains. (That's right -- run into trains, not the other way around.) In such cases, information from the world is entering the driver's eyes. But at some point along the way this information is lost, causing the driver to lose connection with reality. They are looking but they are not seeing."
Ronald A. Rensink

More Background

Video Examples for Practice

New Mania? Perhaps, but...

December 26, 2004

Consider quote and chart from Barrons:

"And, of course, equity investors have been walking on air for a couple of months now. The better tone no doubt owes something to the decline in crude. But, after all, $44 crude is not exactly an excuse to party, especially when, as we hinted in our opening screed, the outlook for the economy is more than a little problematic. But don't try telling that to the average man in the Street who's absolutely convinced that happy days are here again. By way of proof, said average Street person points to the incontrovertible fact that the Dow has been setting one 3-year high after another, and the Standard & Poor's has also leapt to a new peak since '01. Mania, to be sure, doesn't build in a day, and the current one started back in early August and has been picking up steam ever since. But in truth, 2004 as a whole hasn't been a bang-up year for the stock market. Nothing like 2003. To date, the Dow is ahead by a piddling 3.6%; Nasdaq and the S&P have done better, but even their performances are a less-than-sensational 7.8% and 8.8%, respectively. Jim Stack, proprietor of the InvesTech newsletter, who has been very much on the money in his market calls the past few years, ventures that investors have an exaggerated notion of how long bull moves last. A lot of them have come of investing age during the extended bull markets of the 1980s and 1990s and assume the present upswing is of that genre, with years to go. Ain't necessarily so, Jim cautions -- a sentiment his chart, which graces this page, confirms graphically:

Typically, bull moves fade in roughly 2 years, which means this one may be pretty much on its last legs. Sorry about that. But Merry Christmas, anyway."
Alan Abelson, Barrons

I often enjoy Alan Abelson's direct commentary, but attempting to use this chart for trading decisions seems most problematic. The chart shows historically what has happened and perhaps properly outlines a building "mania". It does not, however, equal a trading strategy for up and down markets. Predicting bull or bear markets is not the goal. Following the trend, whichever way it goes, seems more logical (and more profitable).

Accuracy Revisited

December 24, 2004

Consider the following language from an online ad promoting trading advice:

A. Has been 81% correct on long and short trades in the S&P 500 Index between 1/03/1994 and 4/12/2004.
B. Offers you swing trading opportunities almost daily in widely traded stocks such as AMAT, YHOO, INTC, KLAC and many more.
C. Had only one losing trade out of 11 in the SPYs in all of 2003.
D. Was correct on nearly 80% of all trades (long and short combined) in the Nasdaq-100 during the 2000 - 2002 bear market.

Sound too good to be true?

Amazon Sales Ranks

December 23, 2004

Trend Following continues as a bestseller 8 months after release:

#2 -- All Investing Books > Futures
#3 -- All Investing Books > Stocks
#1 -- All Investing Books > Options
#12 -- All Investing Books
#45 -- All Business & Investing Books

Lose to Win

December 21, 2004

"Well, what is the crowd made of - the trading crowd, that is? Of above average intelligence; good at their lessons; possessed of highly analytical minds; plausible; conforming. The kind of couth, clean-cut individual that appeals to members of the investment committee, because he (she) resembles them or incarnates the image they have of themselves. Such are the people who run the management funds, bank trading desks, trust departments and economic advisory sections, at the major financial institutions. You can hear the voice of the 'risk-committee' meeting in your mind which decides you've been naughty, so you close out a perfectly good position. The answer is that 1) trading is a game, which 2) is won by playing according to the rules of the game; and 3) if you do that you make money over time; but 4) it's OK to lose money, that's part of the process of winning. If we're worried about losing money, we have a problem with taking losses, and cutting losses is one of the rules of the game. If we're worried about keeping the money we've made, we have a problem with letting profits run, which is another of the rules of the game. If money matters greatly to us, it may help if we don't keep tab of our equity - especially when we're ahead. That may sound odd, but knowing your equity all the time encourages worry; and worry destroys judgement. We must view losses and gains with equanimity."
John Percival

Crisis Hunting

December 20, 2004

It might sound simple, but are you crisis hunting with your trading strategy?

Why would you want to hunt for a financial crisis? Almost all great trends spring from some form of a crisis. Someone messes up trading for their company account, some company goes belly up, etc. These types of events happen regularly and if you know that to be a fact, then you simply need a trading strategy like trend following to take advantage.

But there is a catch.

When a crisis makes the news it is often too late to profit. The great trend following traders take their positions in markets long before the big event or crisis is ever on the radar screen. They don't have inside information, but they do have the knowledge that historically a trend often starts long before the final blow-off. Take a look at an old Enron chart for example. That trend was straight down for a long, long time before it was front-page news.

More Long Only

December 19, 2004

It appears the race is underway to offer "long only" hedge funds. A recent Bloomberg article confirms the plans of Lee Ainslie (Maverick Capital) and Bruce Kovner (Caxton) to offer such funds.

Read article.

The evidence to go long only does not appear to be strong. This new craze seems designed to generate fees for the trader. Additionally, the article speaks of trading "without hedging". The term hedge fund to begin with is a misnomer. Hedge funds generally speculate for profit. They don't generally "hedge" as there is a cost with hedging just like there is a cost with insurance.

S&P Fund Paper

December 16, 2004

This document from S&P outlining a trend following fund is worth reading: download (2.5M).

Elliott Wave Hype

December 14, 2004

A very "promising" email arrived here today:

"You will also discover how you can learn all the forecasting and trading secrets that allow our traders at XXX to make profitable calls 95 times out of 100 and pull average returns of 445%, 59%, 13%, and 701% on ForEx, indices, stocks and commodities."

Wow. 95% accuracy! Come on. Give me a break.

This email goes right to the great desire so many seem to have -- they want to be "right". The average trader thinks accuracy is the goal. They mistakenly think that if you have high accuracy on your entries that you will make a fortune.

What if 95% of the time you make pennies and 5% of the time you lose thousands? What if you knew great traders have accuracy in the rough range of 35-50%? More importantly put aside high accuracy entry fallacies for a moment, when do you exit? Do you ever hear the charlatans bragging about "exit" accuracy? No.

Rich Mathematicians?

December 13, 2004

"If all it took to beat the markets was a Ph.D, in mathematics, there'd be a hell of a lot of rich mathematicians out there."
Bill Dries

Stephen Hawking Gets Real

New York Times: What is your I.Q.?
Hawking: I have no idea. People who boast about their I.Q. are losers.

New York Times: How can we know if you qualify as a genius physicist, as you are invariably described?
Hawking: The media need superheroes in science just as in every sphere of life, but there is really a continuous range of abilities with no clear dividing line.

Great Traders Don't Anticipate

December 12, 2004

The following statement crossed my desk the other day:

"The path to superior returns in the stock market is to anticipate changes in investor expectations. The question is how to do that."

This statement is false. Great traders don't anticipate. They surely do not attempt to anticipate "changes in investor expectations" -- whatever that may mean exactly.

Great traders react to price movement. Great traders know that to anticipate is to predict. They know prediction is folly.

Slow Learning

December 10, 2004

A family friend remarked the other day that "sell signals" had been given on satellite radio stocks. I said, "what if they keep going up?" He said, "the idea is to try and get out before the top." I said, "how can you do that?"

I tried to get him to see that you can't time the top, that you exit after the peak. He did not see the logic and continued the debate.

This friend has read Trend Following, but instead of debating the concepts within, he maintained his "beliefs" and stood his ground. He is convinced the top can be timed.

Translations of Book

December 08, 2004

What translations have been secured for the book "Trend Following"? So far, German, French, Japanese, Chinese Traditional & Chinese Simplified translation deals have been signed. Stay tuned for availability announcements.

Trend Following Confusion

December 07, 2004

Even with the release of the book Trend Following, there continues to be confusion as to what trend following is all about.

Here are some statements that are false:

1. Trend following is not about "numbers".
2. Almost all mechanical trading systems break-down eventually.
3. Price analysis alone is not useful.
4. Trend following volatility makes trend following trading systems more risky.
5. Technical & fundamental analysis together is wise.
6. You must anticipate changes in the market.
7. Fundamentalal analysis will help reduce false entry signals.

Hedge Fund Freedom, Not Fear

December 06, 2004

Before I go too far using the term "hedge fund" please recall an earlier comment.

That said, a great article from Mises.org offered:

"A market is only a means to an end; it a process set in motion by the actions of individuals and their valuations. It works as a means to satisfy various ends because, when unfettered, the pricing mechanism has a wonderful way of allocating scarce resources. Financial markets also provide strong built-in incentives to police themselves, since there is money to be made doing it."
Christopher Mayer
Provident Bank

Read full article.

Speculation by Governments

December 04, 2004

"China is set to tighten supervision of domestic companies trading futures overseas following a US$550m loss in derivatives posted by China Aviation Oil (Singapore) Corp, state press said Friday. An official from Sinochem, one of 17 state companies currently allowed to trade futures in selected overseas exchanges, was quoted by China Daily as saying "the regulators are very cautious". He and other industry experts were cited as saying supervision was expected to become stricter after CAO's losses. CAO, listed and headquartered in Singapore but majority-owned by the Chinese state-owned China Aviation Oil Holding Co, posted the losses when oil prices surged to as much as 55 dollars when it had bet that prices would fall."
Media Reports

You would be a fool to bet against Chinese growth in the years to come. But when you read that a state-owned business was betting against oil price increases and then blew up, you must pause. I seriously doubt anything that is state-owned will be able to ever compete against the world's great capitalists and speculators -- and win regularly. The market is a tough place and if you are not ready to play with the big boys, they will teach you a lesson.

Mark Cuban "Gambling" Hedge Fund

December 02, 2004

Mark Cuban, the owner of the Dallas Mavericks professional basketball franchise, has proposed starting a hedge fund that makes money from "gambing".

Read:

1.) Mark Cuban's blog entry.
2.) CNN/Money press report.

Whether Cuban's project lifts off the ground or not, he should be saluted for his statistical thinking and his correct analysis that markets are inefficient. These beliefs (not the gambling fund as I don't know how the great trend followers would feel about such a venture) place him in good company with trend followers. I would be curious if Cuban is aware of trend following trading.