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

Hedgestreet Offers New Agricultural Contracts

July 31, 2005

HedgeStreet now offers monthly Yes/No contracts based on the estimated corn and soybean production forecasts released by the USDA's National Agricultural Statistical Service (NASS). The crop production reports are carefully monitored by commodity futures traders and have a direct impact on prices. The corn and soybean reports are released by the United States Department of Agriculture on a monthly basis from August through November as well as in January. Said John Nafeh, CEO of HedgeStreet: "Corn and soybeans are highly sought-after commodities used in thousands of food items and industrial applications. By trading these new Hedgelets, HedgeStreet members can offset risks associated with rising and/or fluctuating corn and soybean prices or speculate on the direction and degree production forecasts will change."

How Does a Drawdown Occur?

July 30, 2005

A good quick and dirty explanation from Christian Baha's Superfund (formerly Quadriga):

"There is no system which can immediately and accurately identify the difference between a short term fluctuation and a big, long-term, profitable trend. From time to time, the trading system enters trends, which despite promising signals, reverse very fast. These erroneous signals may cause losses if they occur cumulatively. In so-called sideways periods, when no clear trends can be identified, erroneous signals occur more often. As hardly any clear trends develop during such sideway movements, it is difficult to yield profits in these periods."
Superfund Newsletter

Most of Wall Street expresses surprise with any decline in any market. Trend followers on the other hand know ups and downs are part of the game. They honestly talk about declines before they ever happen. What do you want? Honest talk about the ups and downs? Or would you rather listen to Wall Street's silly predictions and cries of "what happened?" whenever there is a decline?

Rupert Murdoch's Son Lachlan Quits

July 29, 2005

From Reuters today:

"Lachlan Murdoch, considered a frontrunner to succeed his 74-year-old father Rupert as chairman and chief executive of News Corp., on Friday resigned as an executive at the media conglomerate. The younger Murdoch, 33, will leave his post as deputy chief operating officer at News Corp. and publisher of the New York Post tabloid newspaper on Aug. 31 but will remain on the board, News Corp. said...News Corp.'s Australian shares fell 1 percent on Friday to A$22.96, bucking a 0.5 percent rise in the broader market."

Murdoch's son resigning is one thing. Connecting the share price movement for any one day to something like this is wishful thinking. This kind of story might be great for all those fundamentalists out there who think data like "resignations" is useful for market predictions, but to the great traders this type of less than critical information, on any one day, is noise.

Dean Hoffman Interview

July 26, 2005

The following interview is between Trade Center Inc. and Dean Hoffman:

Trade Center Inc.. What is your entry method to the market? Is it price-based or do you rely on some proprietary mathematical formula? Is position sizing done in the same method? How important is position sizing? What do you base position sizing on?

Dean Hoffman. My primary entry is based on some form of trend recognition. It is not merely a function if price but rather a combination of algorithms and filters. I also use money management overlays for position sizing considerations, as it's a critical component.

Continue reading Dean Hoffman Interview »

Morality and Psychology

July 24, 2005

Brett Steenbarger recently authored two articles covering the morality of trading (DOC) and the reprocessing needed to be a winner (DOC). Both very good food for thought.

25 Unwritten Rules of Management

July 23, 2005

Bill Swanson, CEO of Raytheon, wrote an unpublished book about management that seems to dovetail in many ways with great trading. Read the Business 2.0 article that broke open the "rules": The CEO's Secret Handbook.

Bill Swanson's '25 Unwritten Rules of Management':

Continue reading 25 Unwritten Rules of Management »

Clear Minded Are You?

July 22, 2005

I was forwarded a nice excerpt today from a trader:

"Clear minded thinking is absolutely critical as a trader. I, personally, know how it feels to be in a trade and you are feeling great about it. Then, all of the sudden, it goes against you and you end up taking a big loss. The feeling is not a fun one, but you have to move on to the next trade and leave any negative thoughts behind. Otherwise, it will lead to your views on the next trade being skewed one way or the other. In the book Market Wizards, Paul Tudor Jones is being interviewed by Jack Schwager, asking about his timing. I don't have the exact quote, my copy is at home, but Jones is discussing how a headline may read that he shorted the S&P 500 Index (SPX) two ticks from the top. He goes on to say how what the headline doesn't tell you is that that might have been the fifth or sixth time that he had attempted to short it and had been stopped out on all the previous attempts. How many of you would have the courage to keep jumping in and shorting it after being stopped out two or three times, let alone four or five? While Paul Tudor Jones does not come right out and say "next trade," he certainly is displaying this type of behavior when he continues to enter trades and continues to get stopped out, but he has the conviction to keep entering the trades. Even if you think I am not worth paying attention to, Paul Tudor Jones certainly is."
Rick Pendergraft

Jim Cramer's Picks

July 21, 2005

How good is Jim Cramer? Read PDF white paper that examines Cramer's "picks".

Limit Parameter Control

July 20, 2005

From CSI's Technical Journal:

"Every process you consider [in a trading system] requires some level of decision-making control to force a market profit. Your trading algorithm should have at least one trigger to explicitly buy or to sell a given commodity [or any market for that matter], and to take a profit or a loss as time and market conditions unfold. These triggers, called parameters, can be used alone or in conjunction with other triggers to develop specific trading signals. Overcomplicating the decision that gets you into the market tends to consume statistical degrees of freedom. The more freedom you take out of the market (adding process control), the less chance your trading algorithm will be successful. Factors such as commissions, slippage and inevitable errors made by you and your paid partner, the broker, all impact the likelihood that the market will pay back your risk capital. Excessive parameter control artificially minimizes their impact."

Turtle Endorsement

July 17, 2005

While my book Trend Following rightfully heaps praise on the Turtles who have had great success, it also casts doubts on those Turtles who became con men. However, the ones who have made "it" appreciate the book. Here is some private feedback from one of the few great ones. This trader has nearly a 20-year record of damn good performance:

"I enjoyed Trend Following very much and thought you did an excellent job on it. Best wishes for continued success, Michael."
XXX
President
XXX Capital Management

Walk In Fund

July 14, 2005

From the July 18th Businessweek:

"You once had to have big bucks and bigger connections to get into a hedge fund. Now you can walk into a retail office in Manhattan across from the New York Public Library main branch. That's where Superfund Asset Management, the U.S. division of a Monaco-based hedge fund, has opened its Superfund Investment Center to "educate people about this asset class," says Managing Director Aaron Smith. The storefront is one of the unusually public ways in which Superfund is marketing its two managed futures funds, a type of hedge fund that invests in stock, bond, currency and commodity futures. It has run a commercial on CNBC. It also hired former President Bill Clinton to speak at the office's March opening -- although he pulled out, citing his recuperation from lung surgery. Because the funds are registered with the Securities & Exchange Commission, you can generally get in with a net worth of $150,000, Smith says. The minimum investment is $5,000. How is performance? The B shares rose 27.7% in 2003 and 16.82% in 2004, but are down 17.3% this year. B share fees are a superpricey 10.63% -- though after 2 1/2 years they fall to 6.63%. Hey, rent is high in midtown Manhattan."
Anne Tergesen
Businessweek

Eclipse Capital Management

July 13, 2005

Eclipse Capital Management, a prominent trend follower, recently authored a white paper addressing performance. Their key conclusion was a nice academic way of saying, "stay in for the long term and don't get out at the bottom!"

Their comment:

"By increasing one's holding period, the investor reduces the probability of GMP [Global Monetary Program - a trend following fund] underperformance to a point where it is a minimal risk, while at the same time having the potential to participate in periods of substantial outperformance. This very attractive pattern is similar, but not identical, to that of call option - where the risk is limited and the upside unlimited."
Eclipse Capital Management

Amazon Rank #377

July 11, 2005

Trend Following was ranked this morning #377 of all books available at Amazon.com. Thanks for the continued interest 15 months after release!

New Market Wizards Wisdom

July 10, 2005

Always understand the risk/reward of the trade as it now stands, not as it existed when you put the position on. Some people say, "I was only playing with the market's money." That's the most ridiculous thing I ever heard.
-Bill Lipschutz

Continue reading New Market Wizards Wisdom »

Sports Betting Psychology

July 08, 2005

A good read from a sports betting standpoint (PDF).

Money Management BS

July 06, 2005

I recently saw the following comment regarding money management:

"Every system in our report uses very simple money management: Trade one contract per trading signal in the markets specified by the vendor with no pyramiding."
Trading Guru

This is NOT money management. If you ever see anyone declare the above as money management walk away fast as you are about to be conned. Money management is not some set amount of shares or contracts picked out of thin air. Money management answers the question of "how much?" At all times, given the risk you are taking, the money you have, and the volatility of the market -- you must know the optimal number of shares or contracts to be long or short.

Jim Simons Top Trader

July 05, 2005

It is getting harder for hedge-fund managers to generate above-average returns when their funds grow too big, right? Tell that to James Simons (PDF).

Profits Come From?

July 04, 2005

Where do profits from trend following trading come from? One source of profit comes from the mistakes of other market players.

For example, read this recent article from the New York Times.

Ed Seykota on Testing Trading Systems

July 03, 2005

Ed Seykota was recently asked:

"I've got Excel on my computer...is it possible to make a good trading system on Excel or do I need to purchase...[a] sophisticated software program?"

Seykota Answered:

"A trading system is an agreement you make between yourself and the markets. You can use a number of ways to test the agreement before you make it. Excel has the advantage that you can see everything the system does. Other software has an advantage of speed and ease of use. You might consider starting off with Excel until you get a feel for system trading, and then move on to more specific software for comprehensive testing. You might also consider auditing a few runs of your testing software with Excel, to make sure you have accurate coding."

Visit Seykota.com here.

Making Big Decisions

July 02, 2005

Making big decisions?

An excerpt from Fortune Magazine:

"When you see a trader panic, you can be pretty sure that for the next few hours, he's going to lose money. All the base instincts in your brain--what I call "caveman brain," the sort of fight-or-flight feeling of emotion that is designed to stop you from being eaten by a sabertooth tiger--takes over your decision-making. You start trading scared, taking smaller positions on good ideas and cutting profits too quickly."

Read Fortune Magazine Article

Citigroup View of Trend Trading

July 01, 2005

Citigroup View of Trend Trading: Read (PDF).