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

Aussie Dollar Opinions

February 28, 2006

Feedback today:

"Hi Michael, I enjoy your updates and information on trend following. Have read your book - congratulations, excellent work. We are an Australian fund manager with a quant and behavioral model which in essence is a trend following system. A value manager that I was speaking to yesterday pointed out this article in the Sydney Morning Herald (PDF) which I thought you may find an interesting read. We were discussing value investing and trend following etc etc. He just didn't get the point. I had a great belly laugh at the word 'insidious' used in this article. Obviously the journalist in question doesn't quite get it either. Kind Regards, Tony P., QLD Australia."

Yes, the use of the word 'insidious' is quite humorous!

Trading Mentors

February 27, 2006

Brett Steenbarger, at a recent FIA event panel, offered insights regarding trading mentoring. You can listen to the 1 hour long audio presentation here. You will need the free RealPlayer to listen to this audio.

Christian Baha's BusinessWeek Profile

February 26, 2006

Christian Baha, CEO of the trend following firm Superfund, is profiled in the current BusinessWeek. The profile paints a compelling portrait of Baha's firm and their desire to expand the message of hedge fund investing to the general public. However, the article's desire to make Superfund's trend following strategy appear as hocus pocus or some form of a Holy Grail, misses the boat. The author of the article doesn't seem to "get" trend following trading. Side note? The hard copy issue is much more interesting as it includes numerous pictures.

Fundamental Confusion

February 25, 2006

This arrived in my email box today:

"The major indices have rallied over the past several weeks in response to an $11/bbl drop in the price of crude oil. Market players need the price of crude at a minimum to stabilize before sending the major averages and the broad market higher. In the near term this may be a tall order as this week traders once again bid crude higher in reaction to stepped up Mid-East tensions. My readers know that as long as crude oil remains on a roller coaster that stocks will have tough sledding. Even the energy issues which I have long advocated are having a difficult time. Investors need to remain patient until the market gives a clearer indication of where it wants to go."

If you follow the advice above, how does it help you to answer these questions?

1. How do you determine what market to buy or sell at any time?
2. How much of a market should you buy or sell at any time?
3. How do you determine when you enter a market?
4. How do you determine when you exit a losing position?
5. How do you determine when you exit a winning position?

More from Seykota FAQs

February 24, 2006

At Ed Seykota's FAQ he was recently asked:

"Would you recommend [attending] your seminar based on the following:

Am I going to be able to put together a trend following system after your seminar and start trading?"

Seykota responded:

"You can put together a trend following system if you are willing to do so."

Seykota always holds the mirror up. Are you able to look into it?

A to B

February 23, 2006

Feedback today from Isaac Mehary:

I enjoyed your recent blog entry titled 'give and take'. It is in our nature to find 'reasons' that soothe whatever our psychological needs might be...At the end of the day, there has to be a trend from point A to point B...to realize a profit. Hack away at the unessentials and the trend is all that remains, even for fundamentalists and Paul Tudor Jones."

Give and Take

A reader, Jose Rodrigo, wrote me last night:

"Hello Michael, Let me say I really like your website and read it regularly. I subscribe to the trend following philosophy and I'm a trend follower myself, however I am also a person who seeks the truth. It seems you present some inaccuracies in your recent article and on your website. In your article you say (in quotes):

Actually you can. See Jim Rodgers, who is a long term trend follower and bases his decisions on fundamental and economic analysis. See also George Soros."

I disagree. The technical trend following I write about in my book, the style specifically practiced by the men profiled and their performance data, is not fundamentally based. Trend following does not attempt to answer "why" questions, fundamental analysis does. Jim Rogers, who I like and admire, said this to me:

"I am not a trend follower as you probably know."

Jose continued by quoting me again:

"The great trend followers trade objective methods."

It depends on what you mean by "objective".

I am clear about "objective" in my book. Very clear. Jose continued:

"Successful trend followers trade a system that is adapted, so to speak, to their individual and subjective tolerance to risk and reward.

I know - I state this. Jose continued:

"If it were an objective method, then all trend followers would choose one system: the one that produces the maximum profit."

That's not true. That logic doesn't make sense to me. Once again, I have made the case why not all trend followers trade balls to the wall. Jose continued:

"Let me quote from 'Market Wizards': "Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of tops and bottoms. If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I'm not comfortable doing that" and "Elliott Wave theory allows one to create incredibly favorable risk/reward opportunities. That is the same reason I attribute a lot of my success to the elliott wave approach."

You have ignored all of the specific performance data in my book and latched onto one quote from Paul Tudor Jones. Direct access to Jones' performance is not available so we are not able to compare his performance numbers to trend followers from a correlation stand point. Jose continued:

"Just because you and I can't or won't make money using the methods you criticize doesn't mean no one can do it."

Can you outline objectively what Elliott Wave actually is?

"I understand your business is trend following, and it doesn't make sense to promote Elliott Wave on your website, but using quotes from a contratrend trader on your website doesn't make sense either."

Paul Tudor Jones has made the bulk of his money from big macro trends.

Fundamentally 'Nuts'?

February 22, 2006

Thw Wall Street Journal ran a piece the other day discussing the "letters" hedge fund managers send clients. Take a read (PDF). An excerpt:

"Struggling to find just the right words to explain a run of bad luck to investors, money manager Michael Roth looked to literature for inspiration. He found his muse in Edgar Allan Poe. That is why Mr. Roth, who helps run Stark Investments, a Milwaukee hedge fund with $7.6 billion in assets, recently wrote one of his periodic letters to investors as a takeoff on "The Raven":

The poem goes on for three-and-a-half pages. Along the way, it not only refers to the new Federal Reserve chairman, Ben Bernanke, but also manages to rhyme "trading floor" with "macroeconomic lore."

I am not sure what to make of these efforts.

Seems Like 1999

February 20, 2006

Not a Prince fan, but I do recall his lyric:

"So tonight I'm gonna party like it's 1999..."

Apparently, in Japan, it's 1999 all over again. Read up on the day trading craze.

Surrender

Can you accept the idea that in order to be successful you must "surrender" to the market? If you can stop worrying about what might happen or what should happen, then you are free to focus on what the market is doing right now. Isn't that where the money is to be made? In the moment of right now?

Korean Translation

I just received the full cover of the Korean translation of Trend Following. You can view the cover here. The publisher is TheNan Publishing Co. and the ISBN is 8984053244.

Seykota's FAQs

February 19, 2006

At Ed Seykota's FAQ he was recently asked:

"I notice the stock currently trading around 360, down from about 435 overnight, down from about about 475 earlier this month. How can an earnings report cause such a big sell-off?"

Ed responded:

"In the Causal Model, disappointing earnings "cause" a 20% sell-off in the stock price. In the System Model, you look for evidence of a shift in the intention of the culture, such as buying toys, turning the job of keeping the corporate ethics over to management and compromising the company motto. In the Trend Following Model, you simply notice the long-term trend is still up and the short-term trend is sideways to down and you follow your system."

I like the way Ed Seykota thinks.

Not Seeing 'It'

Feedback from a reader the other day:

"I just listened to one of your audio comments [about] getting on trends when they are already fully developed. Would this be the case with the Sugar trend at the moment? I understand it hit much higher highs in 1974 and 1981."

That is part of the idea, yes. But I am not saying don't get on, I am saying have a plan. He responded:

"Thanks Michael, briefly how do you see this trend in comparison to 1974 and 1981?"

What do you mean? He responded:

"I just put Sugar charts [from] 1974 and 1981 on the window against each other up to the sun. They are virtually the same price formation. You never can tell, but the 2006 chart seems only to be in the early stages of the super spike trend as you call it. The same type of fundamentals are here: ethanol, oil. I read Jim Rogers 'Hot Commodities'. He believes we are in a secular commodities bull. Hard to disagree. I am late, but I think in reality it is only just the beginning. Managing price corrections and stops the name of the day. What do you think?"

You already told me you read my book, but you are asking for a fundamental opinion? I have no idea what will happen in the future. Follow the trend with rules is the best strategy I can offer.

Purchase Translations

February 18, 2006

If you want to purchase an Asian translation of Trend Following simply cut and paste the ISBN number below into Google. This will show all international book stores selling translations of Trend Following.

1. Japanese ISBN: 4775970461 (Publisher: Pan Rolling)
2. Korean ISBN: 8984053244 (Publisher: TheNan Publishing Co.)
3. Chinese-Traditional ISBN: 9861542035 (Publisher: Pearson Education Taiwan)

ISBN: International Standard Book Number; a unique ten digit number assigned to every printed book.

Superfund Magazine

February 17, 2006

An article (PDF) of mine recently appeared in the Superfund Magazine Of course, the content is not new to those familiar with my web sites, but their presentation sure is better!

Ratings Mean Zilch

I received this email today from a prominent portfolio manager:

"Attached is an internal Smith Barney memo dated March 2002 (a full two years after the peak of the NASDAQ) that shows the job of the Wall Street research analyst was to support the investment banking function. We all knew that things like that went on - it's just scary to see it so vividly explained in writing. No wonder most mutual fund managers underperform - they still lean way too heavily on Street research."

You can read memo here (PDF).

Taleb Articles

February 16, 2006

There is a very good article (PDF) on Nassim Nicholas Taleb in the just out issue of Active Trader magazine. I don't subscribe, it just comes to me, but this one article was very good. The link above is, however, an abbreviated version of the print version. Taleb is another trader, like trend followers, chasing 'fat tails'.

More Taleb? Here is a Fortune article (PDF) on Taleb and his class syllabus (PDF).

Obi

The Japanese version of my book had a sleeve (image) over the lower half of the book. I learned tonight from my Japanese publisher that this is an "obi":

"Obi" literally means a band or belt you wear with a kimono. I am not sure whether such a thing exists in your country or not. It is slid over the lower part of the book cover. Usually "catch phrases" are written on it."

Ok. Maybe useless trivia!

All Trend Followers?

February 15, 2006

Feedback from Fidelity employee:

"If every market participant were a trend follower fixated on price alone then the markets would never move. The participants that place a value on a financial instrument provide the opportunity for trend followers to participate in the game. They get the ball rolling so to speak."

Maybe, but it would also depend on what lengths of trend were traded. But realistically, how could we ever have everyone trading as a trend follower? The psychology behind it all is not what some people will want in their lives. Most people want the easy road even if the perceived easy road is not so easy.

The follow-up question came next:

"Is it possible market volatility may some day be measured as a function of the number of trend followers in a market?"

How do you ever know who exactly is in a given market?

That Which Cannot Be Said

That Which Cannot Be Said (PDF) from Dr. Brett Steenbarger is good reading. An excerpt:

"The role of a good psychologist is to comfort the afflicted and afflict the comfortable. If you're comfortable in bed while your market is in its peak period of opportunity, you shouldn't be comfortable. I told the trader he didn't deserve to succeed for the same reason I'm writing this article: to create a test. I wanted to put a mirror in front of his trading so that he would either close his eyes or squarely face what he saw."

German 'Trend Following'

February 14, 2006

The German language version of Trend Following will be out within weeks. Here is the cover design. As a side note, not sure why foreign publishers seem to all change original cover designs, but they do.

Stress and Babies

Some thought provoking research (PDF 1, PDF 2) regarding stress and childbirth. These articles came up in conversation during a meeting I had with one of the Turtles last week. This Turtle has shun the spotlight, but has a very interesting background and most interesting career.

Web Developer Wanted

I am looking for an experienced web developer/designer. If you are capable of producing the work at my sites currently, and then some, drop me a line.

Schwab Feedback

February 13, 2006

"Hello Michael, I wanted to send a quick note of congratulations, and thank you, for your book Trend Following. I am a regional manager for Charles Schwab who travels around the state of Texas and Latin America helping our clients help themselves. A topic of almost every workshop is reading material - for which your book has provided great value. I grabbed your book from a colleague at CyberTrader where I worked for several years as Business Development Manager, read it, and recommend it as often as I am asked for recommended reading material. Thanks again, XXX"

Trade for Clients Guide

February 12, 2006

There are elements of this CME Guide to Becoming a Fund Manager (PDF) that every participant in the market should read whether you trade money for clients or not. It has 'money management' and 'stop' advice useful for everyone who trades.

CME: "Snowfall Futures"

February 10, 2006

I never pondered the notion that one day trend followers would trade "snow":

"CHICAGO, Feb 9 (Reuters) - The Chicago Mercantile Exchange said on Thursday it will list futures and options on snowfall in Boston and New York City. The new snowfall contracts will be based on a CME snowfall index and are designed to help cities manage the risks associated with snow accumulation, the largest U.S. futures exchange said. "The impact of weather can influence regional and local markets, playing a critical role in the overall economy," said Rick Redding, CME's managing director of products and services. The contracts will launch on Feb. 26, and will trade on a monthly basis from October through April."

Bet Sizing Research

February 09, 2006

Michael Mauboussin of Legg Mason offers this recent research on bet sizing (PDF). An excerpt:

"Edge is key. Recall the foundation of Kelly's model rests on having a view that is different, and more correct, than that of the market. Having an edge requires understanding the market's perspective. As Poundstone writes, 'The stock ticker is like a tote board. It gives the public odds. A trader who wants to beat the market must have an edge, a more accurate view of what bets on stocks are really worth.'"

Salida Capital and Jason Russell

February 08, 2006

Jason Russell, who contributed some great quotes to my book Trend Following, manages a fund (PDF) at Salida Capital. Jason is a trend following trader.

Cheap Stocks!

February 07, 2006

I caught an article today in a respected publication that featured stocks "under $10". Here is a screenshot of the poll taken in the article:

Now, if you ever ponder where "losers" come from in the great zero-sum game...one category of "losers" could very well come from the camp looking to buy something "cheap".

Trend Following in Ohio

Feedback from a manager of a $2B dollar equity portfolio:

"Hi Michael: I love receiving your emails and insightful comments. I manage a $2 billion equity portfolio. One of my primary strategies is trend following. I have been roundly criticized by my fellow portfolio managers and analysts who believe that a DCF (discounted cash flow) model is the answer to successful investing. Sometimes it's very tough explaining that the reason I own a stock is because it's going up. That's too simple for these University of Chicago trained MBAs and CFAs. But some of them are slowly coming around to trend following because they see the results. Over the past 3 years I have outperformed my benchmark by about 800 basis points, while the other portfolio managers are consistently failing to beat their benchmarks. After managing money for over 12 years, I am absolutely convinced that trend following works. I am so glad I found your book. Thank you."
[Name Withheld], CFA Portfolio Manager
Ohio Teachers Retirement System

Of course, the praise is a nice boost to ego, but to me the great insight from this type of feedback is that it presents a view of trend following from someone you might not first expect it from.

Martin Capital Management

February 05, 2006

Michael Martin

Michael Martin of Martin Trading is covered in this interesting piece (PDF) about his trend following trading exploits in India. An excerpt:

"As evidenced by the presence in India of the guys from Martin Capital Management, the country also offers the opportunity to take proprietary trading systems and apply them to the Indian market, either on one's own behalf or as a service to others. Over drinks at Geoffrey's Pub in Nariman Point, Martin's Christopher McCauley describes what they're doing as a form of "insourcing" -- providing Indian investors the ability to layer a trend-following function on top of their capitalization or style-focused investing strategies."

Michael also contributed some great side margin quotes for the revised edition of Trend Following released November 2005.

Sugar Spikes

February 04, 2006

Michael McDougall offers this fundamental opinion (PDF) on the massive Sugar trend now underway. Also, take a look at this chart. Whether the third chart ends like the first two or not, you need precise rules either way. I just don't see how forecasting using any type of fundamental analysis is useful during runaway trends.

Seven Sins of Fund Management

February 03, 2006

"Seven Sins of Fund Management" (PDF) is a good piece of research from DrKW Macro research. Thanks to Jason Russell of Salida Capital for the heads up.

No W.D. Gann

February 02, 2006

A reader laments the "bad" literature on trading available:

"Dear Mr. Covel, I bought your book, Trend Following, because I liked another book by the same publisher. I noticed that in the index, there is no entry for '[W. D.] Gann'. There is no entry for 'Elliot [Wave]'. So far, so good. I decided to read the book. I haven't run across any advice like, 'If you want 4:1 risk reward ratio, buy things that are going to go up 40 points and put your stop 10 points below your entry point'. So far, so good. I'm going to read the rest of the book. Thank you for writing a unique book. I know the word 'unique' gets used a lot, but, in this case, I believe it to be the correct term. Chuck C."

Thanks for the nice words Chuck. Wrapped in your compliment are key pieces of wisdom for the Holy Grail crowd.

Drawdown Clarification

Feedback from a reader regarding drawdown:

"I am not sure where to send my question for Michael. Here it is: It is clear from his book that trend following is neither fundamental analysis nor technical analysis. Trend followers enter the market when the trend is in the early stage and they quickly exit when the trend reverses to limit the losses. Yet, the book talks about drawdowns in trend followers' portfolios. Does not drawdown mean that the trend went against them? It [seems] counter-intuitive."

Drawdowns result from trend-less periods. Drawdowns result from the many false starts that produce many small losses during choppy market periods. Also to clarify, I do not say that trend following is not technical analysis. I say that there are two distinct views of TA and trend following is the "reactive" view.

HedgeStreet Exchange: Update

I have supported the HedgeStreet exchange since first hearing about them. Their creativity and innovation is a good thing for all traders. Two recent releases outline streamlined contracts and first year trading results at the exchange. Keep an eye on them!

Brain Scans of Traders

February 01, 2006

Easan Katir forwarded me this interesting Bloomberg Article titled Brain Scans of Traders Show Link Between Lust for Sex and Money (PDF). With a critical eye to the reporter's use of jargon, Easan commented to me:

"Reporter writes that Richard Dennis' $200 million fortune due simply to "uncanny knack for knowing when to buy and sell." Ignoring system design, backtesting, position sizing, trend following, etc. Sheeesh!"