Michael Covel: Author of Trend Following Category Archives

Category: Feedback

Homer Simpson Moment

May 03, 2008

From a reader:

Mr. Covel, I read both Trend Following and TurtleTrader and loved them both - they were truly eye-opening books for me. May I humbly suggest that you proof-listen to your podcasts before you post them? You mention social security as earning 1.23% "per month" at least twice in the podcast. While I understand it to be a slip of the tongue, others may not. I believe the figure you mentioned initially was correct - returns of 1.23% per year. Best, Charles C.

Opps!

When Do You Get off the Ship?

April 14, 2008

Feedback in:

Hi Michael! This is not a response to anything in particular. It may even qualify as a rant. The idea below keeps popping up in many settings and I don’t get it. Maybe you can explain why it makes sense or why it persists when it doesn’t. The idea is the “price target”, as in, “Sell the stock when it reaches your price target”. A common way to create a price target is to estimate what the P/E ratio should be or will be, and estimate what earnings will be. Then, multiply these two numbers to get the target price. Thus, this number is the product (both literal-mathematically and figuratively) of multiplying a guess by another guess to end up with a number that is believed to be significant and should govern your trading. So, if I have a stock that is heading up like a rocket leaving the launch pad, I’m supposed to dump it because it reached some analyst’s price target? Regards, Chuck Cain

From A Spring 2008 Graduate

April 08, 2008

From a reader today:

Hi Mr. Covel, I have been meaning to thank you for a while now, and because I just found out that a friend of mine at [College Name], [Name], is a family friend of yours, I am finally doing it. This past summer, I was at the bookstore and came across your first book, Trend Following and I really liked it. I started reading your Blog, and later subscribed to your Podcast (I went back and listened to every single Podcast you have made). I also picked up the Complete TurtleTrader. All the knowledge that I acquired from your material helped me a ton with my Finance interviews this past Fall, and ultimately helped me land pretty much my dream job (Assistant Trader at [...], which is a proprietary trading firm/hedge fund in New York; I will basically be getting paid to learn from professional traders for 2 years). At my interviews I was able to talk about trend following and the idea of buying high and selling higher and shorting low and covering lower (which obviously goes against what I had previously been exposed to). Who knows if this ends up being the foundation for my trading philosophy (I will be trading equities, so chances are it may not), but it was your engaging and easy to read books that got me thinking about different types of trading philosophies. After learning about trend following, it was my natural inclination to learn about the other side of the spectrum as well, and so I also bought Victor Niederhoffer's books and read his Daily Speculations blog. In the end, I know that if I am going to be a successful trader, I am going to have to find my edge on my own, but reading and listening to your words has been a huge benefit for me. I know it is often a challenge for people to break into finance without really knowing anyone, and I really believe that I may not have gotten the job I got without your work..Thanks a lot for the time. As long as you keep putting out new stuff, I'll be reading and listening! Take care. Best, XXX

A random world separated by often far less than six degrees!

A Veteran View of "The Complete TurtleTrader"

April 04, 2008

Feedback in from Jack Zaner:

Michael: during the four decades that I have traded, I have read hundreds of books on the subject. After reading yours for the second time, I place it easily in the top ten. My personal fascination, having selected CTAs for some of the earliest public pools, is with those Turtles (and trend followers) who persevered to become incredible successes. You have told a bold story that is instructional at the how-to-do-it level as well as one which challenges the reader to fire up his own ambitions to exceed his trader's grasp. Congrats and keep writing. Jack Zaner

Trading Systems Success

March 13, 2008

An email in tonight:

Michael, I was reading an article in March 2008 SFO magazine page 71, titled "FX Trading on cruise control". The article referenced Richard Dennis and the Turtle Traders, when one portion jumped off the page: "Overall, the use of trading systems has been central to the success of many, if not a majority of, top performing traders." ...my first thought which was........ "well, duh."

True.

Old Pro Insight

March 02, 2008

From a trader who has been at it for a long time:

I am reading your Turtle book for the second time. It's a marvelous human interest story from my perspective about a group of individuals from diverse backgrounds overcoming the odds and winning in a game that most find an overwhelming challenge. With proper mentoring these unique individuals became winners in a game where statistically 95% of the players are losers overall. As a zero sum game 5% of the players win 95% of the money provided by the unconscious incompetents on the other side of the bets less commissions and fees etc. It's just a great game. After 30 plus years I feel what separates winning traders from losing traders is not how winning traders approach trading from a method or system point of view. Many successful traders do quite the opposite styles of trading from their competition. Some traders are great trendfollowers and other traders are great trend "faders". At the end of the day they might both win overall. I believe what separates winners from losers is not how they trade but rather how they THINK about trading while they are trading. Ed Seykota talks about "bet sizing". Bet of course carries the connotation of gambling. Actually trading is significantly more dangerous than pulling the arm on a slot machine. When the wheel stops the game is over. In trading the game does not stop until the market has gutted many traders. An example was mentioned Wednesday or Thursday on your blog. $141 Million. Now that's a big number...Richard Dennis mentioned years ago "with a good money management system a trader can make money flipping a coin. Of course a good trading edge simply increases the returns of good money management". That's perhaps not a direct quote but I understood where he was coming from. So yesterday my business partner flew in from xxx and brought a friend along. The friend is the CEO of a major corporation traded on the NYSE. He has a mid-range eight figure net worth. Just a wonderful people person type guy. Our guest wanted to view some of my work and learn more about my trading method. Perhaps if I ever go public he might want to invest with me. I showed him a few of my charts. I am a 100% technical trader. Awhile back there was a post on your site regarding technical analysis. The bottom line of the post was "technical trading is dead" or something along those lines. I was shocked to learn that. It makes me wonder what I am doing making money most months with my technical system. I will do some more research. Maybe the money in our account is really a mirage or perhaps just a "loan" from the markets? I told our guest a method is certainly important and I feel it is if it's properly executed. I went on to tell him I felt that how I now thought about trading was more important than how I actually traded. I had spent most of that 30 years looking for something that does not exist-a Holy Grail if you will. I mentioned Rich's quote in THE MARKET WIZARDS. His eyes rolled. So then I said "Would you like to see what Rich meant?" Would you like for me to help you design a little trading system in say the Mini ES on say a 5 MIN time frame? We took maybe 15 minutes. All we needed was E-signal and a coin. Of course we have a trading platform with real money. This was going to be real combat with live ammo. The goal for me on some level was to prove to myself what I already know. Trading is a game of probabilities and pattern recognition. Would you like the live fire trading results form yesterday? They are pretty amazing even for this former skeptic. Obviously one day's data flipping a coin as to whether we buy or sell proves nothing. However money management placed on top of the coin flip significantly diminishes the risk of major loss in any a game. If you choose to post any of this please delete my name. I fear someone might send the guys in the white coats after me. The experiment was just one day's results and "Past performance is no guarantee of future results".

Clarification that came in Sunday:

Hey Michael, I failed to mention a very important footnote in my coin flip experiment. I had the option of declaring NO BET within 40 seconds of the flip. For example had the initial flip come up tails thus a SELL I would have had no bet. In fact it came up HEADS and I saw an opportunity for a low risk buy in fact. During the four hours we ran the experiment their were six tosses and four live bets. I am afraid perhaps I was conveying another message in my email. For the fun of it I had a friend help me run the experiment in the replay mode yesterday after lunch. There was zero input regarding a set up and essentially if the coin came up tails we sold and heads we bought with no regards to any chart picture. There were five losers in a row and then two break-even trades and then there more losers. It goes without saying simply flipping the coin with no regard to method would be disastrous. Also had the coin landed in reverse there were several nice winning trades which I suppose makes sense. The two break-even trades were in fact losers had the coin toss been heads instead of tails. Anyway it was a fun experiment that to me at least proves a method is part of the picture for success but overall money management is the real key to trading success.

New Fund Feedback

March 01, 2008

Feedback in tonight:

"Michael, First and foremost, I recently finished reading "The Complete TurtleTrader" and really enjoyed it from start to finish. Your style of writing and insights on what makes these traders great is inspiring. In fact, if you're looking for direct evidence of the impact of your writing, then check out the RL Capital Managed Account Program on www.rlcap.com. My buddy and I began the process of building a trend following system shortly after he got me to read your first book. We have now been managing client funds for 14 months and are pleased at how we have progressed thus far. We have completed many hours of research to build and maintain our system, but the inspiration and knowledge gained from your books has been an integral part of our edge."

Thanks for the feedback, glad you enjoyed my books.

I wrote to you in June '07 to thank you for the inspiration received from the Battle at Kruger video clip that you sent with your weekly. This week's piece on Mark Cuban was good also and obviously these two messages are meshed. I wholeheartedly agree with your comment about reinforcement and inspiration when a person looks at the stories of others who have gone before; I need to keep bathing in the positive atmosphere. When I listened to George Svoboda's music I was transfixed. Here's a man that's in flow. It's like I've been given unspoken validation in pursuing (sticking-to-it) trading success and my dream to take up the guitar again some day. I've been encouraged again to keep on the entrepreneurial path in life. One of the keys for me is to focus on how it will be when I get there, rather than what might happen "if" I fail. Words fail many times in describing feeling, but here's another thank you. Rick R.

Being Right Can Be Wrong

January 17, 2008

Feedback from Jack Zaner:

Re: Rose and her blind spot: I suppose if I wanted to know the temperature outside, I could consult meteorological experts, research climate trends, develop statistical models or I could just look at the damn thermometer (price). Some people would rather be right than rich.

Strange Piece of Miscommunication

January 15, 2008

Feedback in from William L. on this post:

Hi Michael, What a strange piece of miscommunication you have on your site! The expression "talking at cross purposes," applies here, I think. Rose believes that curiosity is important, and why shouldn't she? But that's a bit tangential to your message, which only has to do with trading. There, I think, might be the problem. To continue the weather analogue, I do not wish to study meteorology to inform my purchase of a winter coat. Furthermore, judging by the success of television weathermen to accurately predict today's temperature, I'm not sure it would be worth it. Likewise, when an economist takes their best shot at predicting the price change in a currency pair, I take it with the same grain of salt. I'd rather just trade on price action, because it involves far less effort, is consistent, and its success doesn't depend on me being clever that day. However, that is not to deny that research in the area of economics isn't interesting. It can be very interesting, it just doesn't make me any money. Will

More feedback from Michael H.:

I could very well be wrong but my sense is that for someone like Rose the blind spot will always be there. An epiphany could happen but it likely won’t. I don’t mean this to be derogatory towards Rose. If she has a way to make money with whatever her approach is, then good for her. That said, she appears to be awfully committed to vast amounts information to try and explain cause and effect. I have to admit that her most recent retort was difficult for me to follow and it’s possible I completely misunderstood the point she was trying to make. However, in one passage Rose states:

“Taking your point of view, I should not wonder why it is colder in January as compared to July, not study past weather reports of January in past years, and on that basis not have the useless information regarding the need to buy a winter coat.”

I’m admittedly not the brightest bulb on the tree, but as a life long resident of the mid-west, I have never once consulted past weather reports or other information to ascertain the need for a winter coat. If it’s cold, I wear the damn coat. As it relates to the markets, if price is moving higher, I am probably inclined to buy that market. What are historical weather reports going to tell me about today’s weather that I cannot learn for myself by standing outside on a winter day for about 10 seconds or so? Similarly, what are all of Rose’s sources of information going to tell her about market price that price itself is not already telling her? I’ve re-read what I typed above about 5 times now. I know what I am trying to say but fear that I did not articulate my point very clearly. In summary, Rose’s blind spot will likely always be there. Good luck trying to change her views.

More on the Blind Spot

January 12, 2008

More feedback on that dreaded blind spot:

Regarding "Blind Spot Continues".

Clearly, she doesn't get "it". The "it" is that the "why" doesn't matter - at all. It is useless to know the cause and effect of why something happened because:

1. unless we could poll every market participant we'd never know for sure "why" they drove a price up or down

2. Not all of them were sellers and of those who did sell there would be many different reasons - not just one or two.

3. Even if you did this project every market day, you would need their promise to repeat their decision in the future if (the cause) happens again.

So, just respond to the reaction of market prices, what "is" - nothing else matters. And we don't have the mental capacity to retain all the information she is trying to take in anyway. We all selectively hear what we want to hear, read what we want to read. It's called a short cut. One more thing. None of us really analyze or trade 'the market' as it really is, we only trade what we think it is. Our beliefs are 'our' reality, but not 'reality'. But a price trend is hard to misinterpret - it's either rising, falling, or basing. Then again, people like to add all kinds of indicators to a simple price trend and believe those manipulations represent 'the market' too- but it doesn't. I think you wrote somewhere in "The Complete Turtle Trader" that Dennis believed it was basically important to understand our limitations to make decisions from mountains of "information". I think most who are great at the process of trading will agree. However, we would probably all have better marketing and be more famous if we pretend that we just "knew" something was going to happen, even though we were really just responding to supply and demand. Clients prefer to believe that we"know" a lot or that we are just "smart" and "right".

Mike Shell
Shell Wealth Management, LLC

Up and Down and No News

Feedback in:

I just read Rose's response's. Most people need/want others to know they are intellectually talented. If you can quantify fundamental crap, then you feel smart. If you can explain it to others, they make you feel smart. The markets can only do two things. Go up or go down. You really don't need to be super smart to figure this out. I don't give a S%$# why, or who said what 36 months ago, I just go long or short.

Walter B.

A New Head for Hedge Fund Association?

January 05, 2008

I interviewed Congressman Richard Baker (R) for my film. He is looking at a new job.

Not Norwegian Wood, But Oil

December 18, 2007

Feedback tonight:

I am in the trading department of Norway's Statoil and observing the behaviour of 'professional' traders everyday, I have no doubts that what you wrote in Trend Following and The Complete TurtleTrader holds true. For years I have been pondering on a 'better' way to approach the markets and I believe the trend following concept is my 'holy grail', albeit one that involves hard work, preparation and stomach churning volatility. You deserve praise for enlightening the world with the concept.

NYC Interviews

November 12, 2007

In New York City for two days of shooting now. Six interviews total for this particular two day shoot. Details to follow.

Road Trip

November 10, 2007

13 days on the road shooting for a film documentary has made regular and interesting posts difficult. We finish shooting at the end of November.

Mark Mobius Interview

November 08, 2007

Before I spoke today at an event in Macau (China), I was lucky enough to land a quick interview with legendary Asian investor Mark Mobius. For those with a memory a few years back I am sure Mobius' commercials will ring a bell. While we only had a few minutes on camera he brought making money back to the basics: psychology. Understanding the market psychology and your own psychology was his message.

Recent Run of Interviews

October 16, 2007

In the last 36 hrs I have conducted on camera interviews with Congressman Richard Baker, Congressman Chris Van Hollen and Bill Miller of Legg Mason.

Georgetown University Shoot

October 12, 2007

For the film I am producing we did a shoot today at Georgetown University. It was a great opportunity to sit down with nearly 20 students and their professor to learn about what investment strategies are being taught in school.

'The Complete TurtleTrader' Book Feedback

October 10, 2007

A question from Hong Kong about my new book:

Dear Michael, I bought your book and noticed that Russell Sands was not included among the Turtles. I was wondering if there was a reason for this? I ask because I have always wondered about the relationship between Russell and Richard Dennis. I loved your book. While trend following is not my cup of tea, the insights you brought on the Turtle mindset was invaluable. Thanks for a great job. All the best, Ray

Before I could answer that Russell Sands is indeed in my book, Ray followed up:

Sorry on re-reading this I realize I was unclear. What I wanted to know was why Russell's track record was not among those you published?

Sands was only with Dennis for a year, and I don't have that one year record. In terms of the next 20 yrs he doesn't have a continuous record. For the book, after the Turtle program ended, I aimed to publish those Turtles with a continuous track record. For trading during the Turtle program I published the records that could be found. There was some interesting discrepancies there.

One View

September 27, 2007

From a reader:

Mr. Covel: I certainly agree with your comments that everyone should be able to participate in hedge funds; after all why should the hedge fund managers, companies, the well-to-do be the only ones to have the opportunity to lose their royal ass. Democracy means equal access to losses. I was looking at the last two issues of Barrons at the listing of the hedge fund returns over the last year, five years, etc etc; abysmal! A few exceptions. I don't understand why the funds that see their drawdowns terrifically high don't just use some discretion and get out. I realize this would be counter to the systematic approach that these funds espouse, but it would seem like it might make sense to sacrifice principle for policy; even Hitler was smart enough to pull back from Leningrad after Germany had lost over 250,000 personnel.

Dave Goodboy Feedback on The Complete TurtleTrader

September 15, 2007

I have known Dave Goodboy for a few years. He is not a trend following trader and has not been afraid of dropping criticism my way, but he did have a very nice comment on my new book:

"A historic romp into the minds, motivations and methods of the legendary turtles and the men who created them. Covel has written the definitive guide to the often misunderstood world of the turtles. Even as a turtle skeptic, i enjoyed Covel's book greatly, it should be required reading for all market participants"
Dave Goodboy
Eagle's View Asset Management, LLC

Casting Call for Film Documentary

September 12, 2007

We are looking for diverse range of families and singles of all ages in Washington, D.C. Metropolitan area to tell their stories on camera. You must be available for two days October 1-15 for videotaping in home/or other local location. Please email 4-5 sentences about who you are, how you invest, why you'd like to be in the film and how you can be contacted. I am not averse to participants from other locations, but you would need to travel to DC area. Contact.

Cramer Explodes

August 05, 2007

Barry Ritholtz offers some insights on Cramer's call for the Fed to cut. Here is a clip worth watching all the way through:

Feedback on Feedback

June 28, 2007

Feedback in:

About the feedback you received on auctions from Marc, I think it's fascinating that he starts out with "tremendous controversy about the 'true' value of these paintings" with the word true in quotes, a quotation mark usage I agree with, but then goes on to say "everything from obscure low-value art, up to Picasso works" without acknowledging that the worth of a Picasso is just as much a "true" value, arbitrary and determined solely by how much a buyer is willing to pay, as that of so-called "low-value art," yet he places no quotation marks around the phrase low-value art. It's fascinating because he probably did this unconsciously, not aware of the glaring contradiction.

Good day,
Neil

"...Fairy tale of the ignorant masses..."

June 07, 2007

Feedback in:

Michael - some feedback for you. I've been in the "startup" mode in my trading business for a year and a half now. This seems a far cry from the "spend a couple of months getting going" plan I started with. Yes, I too fell for the quick and easy, fast buck, this trading game is a cinch, fairy tale of the ignorant masses. I had the misfortune of making 3 months' earnings in one and a half days early in the game; this was followed by a 1 months' earnings overnight trade soon after. Do you suppose I was a wee bit heavy on those two? Now, after watching a near 90% drawdown last year and a much more docile 10% drawdown so far this year, I find the need to replenish my trading equity and salvage a few remaining strands of gray, albeit short, hair. Why did I tell you this? Because in the midst of the blood, sweat, and tears, you send out the Battle at Kruger video clip. I would say I can identify most with the calf - never give up. So, with the nauseating prospect of going back to a wage to bolster the old equity and put food on the table, I had to chuckle at the allegory of the calf and my struggle to succeed at this game. I also realized how much I look forward to your "f'morn f'mation" audio clips and the great reference material. Thanks for the inspiration. Keep up the great work! Rick R.

Tokyo Trip

June 03, 2007

I should have posted a note earlier, but if you live or work in Tokyo, drop me a line. I am in town for a few days for a speaking engagement and will have time to get an interview or two in for print and or video.

Covel Podcasts

April 28, 2007

A reminder to new readers, you can find my regular podcasts here.

Sad Day

April 16, 2007

Sad situation at Virginia Tech today. Only a few hours from my home. I have many relatives who are graduates of Tech. It is the State University specializing in engineering, but now the school will forever be remembered for something horrific.

It's Still Mean Reversion

February 15, 2007

An email came in:

I think there is a problem here with naive trend following using the daily data. Even if crude goes to the moon, say $100, and you capture the $50 by trend following, one would need a million dollar account to ride one contract very comfortably on daily data. On the other hand, if one wasn't so concerned about big picture direction and trend followed shorter duration moves long and short in the hourly data, one could comfortably trend follow crude oil with a much smaller account (or larger position with the big account).

Of course it is not impossible to be a short term trader. There are simply trade-offs. Transactions costs are a big issue. Trying to be Jim Simons is an issue. Mean reversion is worth considering too.

Chuck Cain: A Graphical Inquiry into Trend Following

February 10, 2007

Chuck Cain sent in A Graphical Inquiry into Trend Following (PDF).

Short Term Trend Following?

February 09, 2007

Feedback in from the other day:

One advantage I sincerely admire in Trend Following is its simplicity and elegance. Rather than using chart patterns and the like and making many trades during one day or a week... it simply follows the trend, and I truly believe thats where the real money is made. But I have one question I am sure you have received from other traders: Don't trends occur in all time frames? I believe a trader that is using technical analysis and chart patterns to identify an edge where a trend will begin to unfold or carry on, and captures this trend, whether it be over a one day period, or a one month period can be said to be trend following. I know you have spoken and wrote about "short-term" trading... but at the least in theory, it tries to achieve maximum efficiency. Only being in a trend that is currently moving, exiting near the short-term break of a trend, and buying near support of the trend... Is this not a common sense way of maximizing gains? Some trend followers stay in trends that do carry on for months and years but have major corrections where they would have been suited to take profits sooner and sit out the major correction or consolidation and/or look to buy near the support of a trend. I am currently using a swing-trading approach and a intermediate-term trend following approach.

Transaction costs are a big argument against very short term trading. In terms of some of your terms used, it would be wise to define exactly what you mean by 'technical analysis', 'chart patterns', 'maximum efficiency', 'support of the trend', 'take profits sooner', 'major correction', 'consolidation' and 'swing-trading'. Those terms can mean anything.

More on a Proof

February 05, 2007

Feedback from this post:

If it helps, a mathematical "proof" for the efficacy of trend following might be simpler than supposed. In any given trading system (trend-following or otherwise), your long term win-size to loss-size ratio (essentially your "betting odds") must be greater than the ratio of your number of losses to number of wins in order to be a worthwhile endeavor. When the ratios are equal, you win 50% of the time, and your wins are the same size as your losses. No point in trading that system. If the win-to-loss ratio is less than the number of losses-to-wins ratio, then you're losing money, and there's no point in trading that system either. Unfortunately, a real proof would have to demonstrate that all the systems that your reader defines as "trend-following" behave in such a way as to exhibit that positive win-to-loss : losses-to-wins inequality. Perhaps your reader could define all systems that can be labeled "trend-following" first. It would then be up to the same reader to find an example of trading data that was statistically significant (more than 50 trades, let's say) wherein any of those given systems does not produce a positive effect. Given the instance of a losing system, your reader could then triumphantly conclude that not *all* trend-following systems "work," but merely a percentage of them.

Can You Accept A World of Probabilities?

January 31, 2007

Michael, As I suspect is the case of most of your informed readers, I've been enjoying tremendously the illogical ramblings you've been posting lately on your blog (e.g. Looking for a Trend, Much Ado About Nothing, etc.). It is amazing how many people just don't "get it". They seem to have great difficulty accepting a key concept: Trying to predict the future is impossible because of the complexity of the environment. The conventional deterministic logic that allowed the human race to survive in pre-history (i.e. finding a "reason" that explains how things happen) doesn't work when analyzing complex systems. I studied physics in college, and I remember that once we went from the Newtonian deterministic world to that of Quantum Mechanics (which only gives you PROBABILITIES of particles being in a certain location of space/time) everyone had a difficult time grasping the concept (myself included). As numerous studies have shown, our brain isn't "wired" to think in terms of probabilities, conceivably due to how our ancestors evolved millions of years ago - which I think is all to the good! If the majority of people understood probabilities and the limits of deterministic thinking (unlike the sloppy thinkers that you've posted), we might not be able to make money in the market using relatively straight forward trend following strategies. So all I can say is hooray for all the "Cave Men" out there!! Best regards, A. A.

Feedback on "Rain"

Some great feedback on a post that mentioned 'rain' the other day:

Michael - The emailer who ridiculed the idea of betting on "rain" or "no rain"? I'd be happy to take those trades if I knew that a correct bet paid off 2-to-1, or 3-to-1, and an incorrect bet paid off 1-to-1! That's what critics don't ever seem to get about trend-following. Its not about being "right" or "wrong" - its about the expectation of the payoff when you win. I try to explain it this way to friends and colleagues (who never seem to get it either). Granted this is a generalized method that doesn't include trading costs, etc, but I think it makes the point. I'm going to make 10 trades. Before each trade, I'll identify a place on the chart where I will exit the trade for a loss of 1-percent of my total portfolio value if I'm wrong. Let's suppose I make 7 bad trades out of 10. A little math: 7 x (-1%) = a loss of 7% to my portfolio. If I make even a tiny gain on each of the other 3 trades, let's say 5% ( 3 x +5% = gain of 15%), then I've just made 8% (gain of 15% minus loss of 7%) after 10 trades, even though I was wrong a majority of the time. Simple enough. What's the hard part? The hard part is admitting you were wrong on the 7 trades, and exiting when you said you would. In my opinion (and experience), a person can use whatever entry/exit method he/she wants - 55-day breakouts, MACD, stochastics, the moon moving into the house of Aquarius... You want to pick a bottom or a top because of a certain jiggle on the chart? Go ahead - as long as you're only going to lose a fraction of your portfolio if you're wrong. Once you embrace the idea of not getting hung up on predicting a market's behavior, you are suddenly "freed from tyranny." You no longer stay up until 4am analyzing charts and looking for the "holy grail" indicator. You no longer hem and haw over whether to buy or sell a promising stock, only to watch it go up (or down) a little each day until you feel like you've "missed the move" and have even more regret. It becomes easier to shut it all off at the end of the day. In short, you have a life. And best of all, you gain confidence, and over time, make money.

Looking for a Trend...

January 30, 2007

Feedback in from a reader:

What I am unwilling to do is to take something as a truism just because someone says that is the case. Of course, your counter would be "Look at the results of the "Great Traders" cited in your book; however, I could point out that the same rationale could be taken with, say, golf; look at Tiger Woods, or Ben Hogan or Sam Snead - and my response is that the exception doesn't prove the rule - there are some standouts in any endeavor, and that doesn't mean that the "common man" is going to be successful just because there examples of golfers following a certain methodology. I also can comprehend the concept of trading a trend, together with the prerequisites of money and risk management. Obviously, the later two points - money and risk management - are not necessarily unique to a trend following system. Nor for that matter need the systematic approach be unique. Where I have yet to read in your writings, both the book and your web site, is the "how" of finding trends to follow. Without fundamental research, it would seem haphazard to just choose a stock, or commodity, or whatever instrument, and hopping for the best that a person has picked the right vehicle. As Mr. Seykota has pointed out, any trend is a measure of the past, and there is no such thing as the future. I don't buy that, but that is what his view is. What does seem likely, is that the so called "great traders” have through trial and error, experience, or gut feel, or intuition, developed a "feel" for the markets they are trading day in and day out, and are thus able to at least identify the most likely candidates to pursue. BUT, that ability has come with experience and knowledge of the markets they choose to trade; I would equate that with fundamental research. You call it what you will. Of course, an approach would be to "shotgun" the situation by diversifying to the point that one has covered all, or a significant number of, markets so that some are bound to go up if one is going long, or down in price if one is looking to go short. That doesn't necessarily prove the efficacy of the system; it does prove that "chance" can prove you right given enough opportunities. The larger traders with higher capital can afford to spread their bets since they have greater capital amounts. The smaller capitalized trader either would have to significantly reduce the number of markets traded and/or place very small bets in a number of markets. It would seem that if any of the above is a reasonable analysis, then a very important part of trend following is diversification. And in so doing, chances are that at least one or more of the chosen markets are going to trend in the direction you hope for. If you can point me in the direction of any literature or whatever on the "how" and mechanics of how to find a market to follow the trend, I should be most appreciative. I apologize for the length of this. Thanks very much.

p. 227 of Trend Following goes right to your desire to pinpoint a trend. I agree with Seykota.

No Rain

January 29, 2007

This post brought in this feedback:

IMHO, the author must be confused about trend following (and a technical approach to trading). If one were to create a model or system based upon observances of "rain" or "sunshine" (one type of "non-rain") that would be a technical system, not a fundamental one. Making predictions is for people who like the feelings around appearing intelligent or being "correct", which has nothing to do with being a profitable trader. If anything, it is emotional intelligence that matters most in trading. Also to consider that as a speculator, sometimes you don't have to make any predictions or decisions about "the rest of the day" - you can just observe the weather and enjoy that, unless you like the feeling of making predictions. My guess is that your new fan likes those feelings.

Does Everyone Win?

January 23, 2007

Feedback:

Biggest pet peeve - whatever chucklehead on TV saying stocks went down due to "profit taking." EVERY TIME, like clockwork, people are profit taking, which takes the market down. Where are all these profitable traders? Does anyone ever take a loss? Ridiculous.

Feedback on Anger

January 22, 2007

Michael, concerning the "Anger on Top of Anger", it's a shame that this trader criticizes trend following without giving his suggestions on what makes a profitable trading system. I'd like to know his definition of a "top trader" or a "top hedge fund". It's quiet possible that he thought Brian Hunter was a top trader, or Amaranth was a top hedge fund. Anyways, I suppose in his mind it is better to be on "top" and blow up, than be in the middle and have long term profitability.

I still want to know if the angry guy in question feels as if his hedge fund is lucky too?

Anger On Top of Anger

January 21, 2007

Some recent feedback:

But you are out of your league here, Covel. I've got an office full of traders, for one of the top hedge funds in the country, laughing at you over here on their coffee break because you are so out of your league in this discussion on statistics. Our CEO and founder agrees with us, and you have his name on your website. I'd be careful to publicly disagree and post your [incorrect] opinions on your blog until you are certain you are correct about something...Statistically, it is a certainty i am right -- that there is no proof these surviving trend following managers are not just black swans who dodged bullets well enough to stay alive.

That is feedback from a man who subscribes to the million monkey theorem. His view? All trend following traders with success are simply lucky. I asked if that applied to everything in life? Microsoft, Google, etc. I asked if that applied to other styles of trading beyond trend following? I asked if it applied to his firm (which I don't know the name of)? He did not answer.

Oil Trends or Oil Fundamentals?

January 16, 2007

Feedback in tonight:

Michael, one of the sectors i follow over at our hedge fund ... is the energy sector. Wanted to mention some observations that I have. Now that you pointed out to me to observe trends in all aspects of life, I have done so, and sort of clarified a few things.

Trend 1: The qualitative energy sector - everyone is in total group think now that we are running out of oil, that it is a given that we are living on borrowed time with the world's hydrocarbons. As a result, people are drilling everywhere and using the debt side of their balance sheets as they "know" that oil and natural gas prices will recover. Now, I have no idea where oil or natural gas are going - my sense is lower but that is a sense - however, if everyone "knows" something that is unknowable, then I generally lean to the other side of the trade. oil and nat gas prices are imploding, and the bulls from hedge fund mavens like Byron Wien at Pequot, Matt Smmons at Simmons and co, and the rest of the group think herd, are wondering what they are missing.

Trend 2: OPEC production cuts - this is clearly a trend. My experience is that whenever OPEC cuts, it is always bearish for oil, and it is a trend that always continues. OPEC works within a certain band of prices, but high prices create cheating, as we are seeing now. they will continue to "cut" (without success) and this trend will continue.

Trend 3: Oil and nat gas prices. both are heading down and are dumbfounding the "experts". Economics 101 tells you that the price of a good or service (or commodity) will head to the marginal cost of supply, which in the case of oil, is about $42/barrel. No one mentions this on CNBC or any of the other talking heads stations. and, because of so many mutual funds, pension funds and hedge funds, have made their numbers on the energy stocks. Amaranth and Mother Rock will not be the only cucarachas to see the light of day. We'll certainly will have another fund(s) blow up and probably a big pension fund or money mgr have huge down ticks in performance as a result.

I see your view, but from a trend following perspective, a follow the price perspective, I would argue that you are providing elaborate fundamental views. You COULD just make your decisions off price movement alone...and forget the fundamental analysis and predictions.

LTCM Bailout Debate

January 14, 2007

This podcast brought in this feedback:

"Hi, I am a college student who is a big fan of your podcast. One of the ideas I like the most is this notion of accountability and taking responsibility for one's one actions. It's a theme that constantly comes up in your reports. I thought of this theme when I was having breakfast with Roger Porter, a professor at Harvard University and former high-ranking official in economic policymaking in the 1980s and 1990s. We were talking about the bailout of LTCM. We agreed that allowing people to experience the consequences of their actions is a good thing and about the craziness of this notion of being too big to fail. I immediately thought of the many times I have heard the same message in your work. Keep it up in 07!"

Another reader disagreed:

"You are incorrect. The Fed did not bail LCTM out. No US taxpayer money was used. A consortium of 12 banks took control of the fund by investing $3 Billion. It wasn't even a bail out. All the original principals and their investors of LTCM lost 99% of their equity in the fund. The NY Fed did help organize the bailout because the markets had frozen up under the fear of massive defaults. Go back and read "When Genius Failed" by Lowenstein. This doesn't invalidate any of the other good points you make regarding LTCM and their badly implemented strategies."

Nonsense. The supposed defaults should have been allowed. Read.

A Response to the Fastest Man in Michigan

January 10, 2007

A follow-up:

Michael-After re-reading your exchange with "the fastest man in Michigan" and after reviewing his response to my valid input AT LEAST FROM MY PERSPECTIVE, I am reminded of something my mentor [Name] told me in the early 80's. Early in our relationship I asked his opinion on XYZ or whatever. Here was his response: "[Name] I have learned over the years to never give anyone your honest advice. Firstly they will not take your good advice and secondly they don't need your bad advice so don't give 'em ANY advice!" I have learned over the years how true his belief continues to be on an almost daily basis.

Athletes Must Be "Unprogrammed"

Feedback in tonight about this post:

Given your exchange with the trader who is a former collegiate athlete, thought you might find this article interesting. The person being interviewed (a trading coach) makes a pretty persuasive argument that athletes must be "unprogrammed" in order to succeed in trading. As a former Naval Aviator I find (I'm biased, I know) that aviators actually have a pretty good mindset for trading given the focus on pre-flight planning and knowing emergency procedures.

Here is an excerpt from the interview the above feedback refers to:

StockTickr: Do you think trading and sports are similar?

Dr. Doug: Not really. In fact, I find I have to deconstruct the athlete mentality from most traders. You see in sports, you are conditioned to believe that if you fail you just need to work more on your weaknesses or try harder to get improved results. In trading this is not always the case and sometimes may even create more trading problems and even worse performance. Also, in sports you are taught to always think positive and to visualize the successful shot or throw. In trading, to be successful you have to first think about how bad things could get before you do the trade. You have to know, understand and be comfortable with your downside risk. Could you imagine a golfer before hitting a shot thinking about what he is going to do if he ends up hitting it in the water hazard? That is not what you or I or anyone would call a game plan for successful golf. Fact is athletes and weekend athletes should be spending their time visualizing success whereas successful traders have to spend their time imagining “what if” scenarios, disaster situations and how to employ solid risk management. Success in sports is about maximizing the upside, while success in trading is oftentimes more about controlling the downside and letting the probabilities play themselves out. On the surface sports and trading seem very similar, but go down a few layers and the mental game is quite different for each.

Read full interview here.

Accuracy Feedback #2 & Response

January 09, 2007

Feedback from an old pro trader who has made some great contributions over the last year:

Hi Michael-As always I continue to enjoy some of the exchanges you have with both seasoned and new traders. Early in my trading career I found myself hung up on the "need" to be right rather than the "desire" to make money. I learned early that being "right" of having a high % of winners had very little to do with my overall trading success. Those who have a need to be right with a high % of winners will find themselves passing on their best trading opportunities assuming they use some degree of discretion in their trade selections. One of my trading buddies enjoys a trading success rate annually of around 15% winners with 50% losers and 35% breakeven trades. In 2005 he made over 300% on his initial beginning of year trading capital and we are talking a 7 figure account not $10,000 so this guy is the real deal. He chooses not to trade public money for several reasons not the least of which is occasional drawdowns. This is a risk/reward numbers game and most who think it is something else usually face a "forced awareness" at some point in their trading careers. To further emphasize my point everyone has seen ads on the internet for systems being promoted for say a 90% accuracy. I bet 3/4 of these systems are based on a set of past criteria that have very little to do with their future performance. Let's say we do 100 trades in a calendar year. The average winning trade makes a net $100 so we make a net $9000 in the "winners". Now the bad news is the 10 losing trades are for $1000 so we lose a total of $1000 for the year in a system that had 90% winners. Now I realize this is a stretch from reality BUT mathematically this is what happens once a trader commits capital to the so-called "sure thing" trading systems! Have a great day!

The comment above brought in this feedback from the "trader" who originally talked of how important accuracy was:

I enjoy fanciful stories that say "My buddy made 300% on his intial capital". HAHAHA! LOLROF! This is a retort that is suppose to hold merit. That was Stand Up comedy. An this guy go on to say: "This is a risk/reward numbers game and most who think it is something else usually face a "forced awareness" at some point in their trading careers. To further emphasize my point everyone has seen ads on the internet for systems being promoted for say a 90% accuracy. I bet 3/4 of these systems are based on a set of past criteria that have very little to do with their future performance." He is saying "SHOW...ME...THE...RESULTS!" I'll show them NOW criteria. Let's do the experiment now Michael. TAKE THE CHALLENGE. I done this for 6 years and lost my trading account over 7 times from 2001 - 2004. This puts hair on your chest. Now my trading system is "Cut mine losses short" and "let's my profits run". Now I win and PROFIT consistently. You refuse to address PROFITABILIY! You only want to focus on accuracy. You ignore PROFITABILITY. PROFIT. PROFIT. +3% per month. Is this simple enough for you? Blake

Don't worry, I won't torture anyone with more from Blake. It is useful to see how the zero sum game works though.

Accuracy Feedback

Dear Michael, Allow me to indulge my thoughts with regard to this post that I found very interesting. First of all apologies if this is not the correct mail address to send this to but I could not find another way to reply to the post. To begin, it sounds like this chap has never had a serious loss and I hope he never does. The tone in his email is quite extraordinary. Just like the the athletes he described he was, they are the ones that if they start to loose competitions they tend not to be able to turn it around. The main reason being that they don't realise that loosing is part of the game. The only difference is how you deal with the losses that will ultimately determine if you will succeed or not. I say this because I was a promising football player (or soccer I should say) in England until several substitutions during games caused doubt in myself and I slowly but surely disappeared from the scene. Ultimately where I think he is mistaking is equating frequency with magnitude. I won't even go into monthly return target that he appears to be setting. That's a recipe for disaster. The market just doesn't allow you nor are their enough opportunities to do so unless you take huge leverage. And we know what can happen then....In sports, frequency equals magnitude. That is, your number of tournaments/competitions entered (frequency) will equal to the number of races won or lost (magnitude). In trading this does not. You can be wrong over 70% of the time and still have a positive return. The reason being that magnitude in trading has a component to it called risk management. The old adage "cut your losses short and run your profits" is probably the oldest cliché in the market place but one whose power is often overlooked and misunderstood by most participants, professionals and non. Kind regards, Leonardo Cecchini

Leaving Academia

December 28, 2006

Feedback:

Hi, I have been listening to your podcast and I must say that am quite impressed! It is so refreshing to finally hear some intelligent comments in a world full of BS. I have been in academia for the last ten years and I have to constantly (at least for the first 5 years) fight to get my professors to understand that CAPM, APM etc are very flawed models. Firstly because they don't take into consideration market anomalies. Secondly because of their very limited way of looking at risk by not including trends (slope of the moving average). Fine, markets are random in the short term (short-term=bull/bear traps=Devil) but in the long term it is so obvious that markets are trending. A Nobel prize for a flawed model what a bunch of .... Anyway, I am finishing my PhD in economics soon and I am thinking of applying to all top investment banks. My question is: Is there any bank hedge fund that applies systematical trend following that you recommend that I could apply to? Regards, Marcus

Exclusively? None, but its not their mission to begin with. Hedge funds? Many.

The Legend of Robin Hood

December 24, 2006

The Legend of Robin Hood (PDF) is good reading for the holiday season.

Feedback on Math Proof

December 23, 2006

My prior post brought in this feedback:

For the answer to your question, see above. I am actually baffled by this question. How can anyone read "Trend Following", say that they think it's an excellent book, and then ask that kind of question? This reader's question is just further proof of why trend following has always been an effective trading strategy and will continue to do so in the long run. It is the fact that people can have "it" right in front of their face and still not get "it" that assures me that I can continue to employ a trend following strategy successfully. How can you see the results and read JWH's comments on the ability to presuppose change and ask that question? The lesson I take from this is that we should never underestimate the impact of a biased perspective on our ability to filter information and identify truth versus fiction (i.e. forecasts and predictions). Keep up the good work.

And this:

I find such feedback at your site very interesting. I notice certain personality types struggle to see the simplicity of the forest while overanalyzing the complex subtleties of the trees and miss the point. Most mathematical types expect to be lectured by the data. It somehow escapes them that the data is there to serve, not instruct. Trend following is the theory. It is the first principle. It is a means of ignoring, not assessing complexity. Complexity always resides with the individual. Sometimes NOT knowing about a "problem" eliminates it. I find the most relevant part of the book is the front cover.

And this:

The question asked about where is the mathematical theory in the book Trend Following that predicts the success of trend following techniques a priori reverses cause and effect. The existence of any such mathematical theory would axiomatically be a derivation from empirical observation. There is a statistically significant amount of return data from hundreds of trend followers (myself included) that shows the efficacy of general trend following methodologies. In addition, there is audited percentage return data from hundreds of trading firms that demonstrates irrefutably that trend following is a successful endeavor. There is no reason or need to ask for a mathematical theory (before the fact) that proves success other than the common statistical measurements of return data used by all. Success is thus a result of the techniques used by trend folowers, but not necessarily codified as a mathematical proof.
Michael Gibbons
Gibbons' Trading LLC

And this:

Michael: I could not help but respond…mathematical proof ?...huh?...hey I’m just one of those dummies with a major in political science and philosophy…but if your long and the line on the chart is moving up to the right hand corner or, if your short and the line on the chart is moving down towards the right hand bottom corner life is good is it not?...seems to work for me as long as I stick to my position sizing rules to keep from blowing my wad when something unexplainable happens with my underlying that I can’t figure out the reason for on my abacus! Merry Christmas from the great White North

And lastly:

Happy Holidays Mike, The relevant part of the book, in the "New Expanded Edition," is between the front and back covers. My guess is his years spent in the US educational system has him jade-d. If he can't find the relevant section, I'd humbly suggest he "put the book on the table and come back next week."

How to Find Mentors and or Jobs?

December 17, 2006

I have over a long time been able to find 'access.' Readers see it and emails like this result:

I am writing you because I have a burning desire to become a professional trader. I graduated college in June with a degree in Economics and History, and currently, I am putting my full-time efforts into educating myself about trading. I have read your book on three separate occasions within the last two years, and I frequently reference it. I feel as though I have built a good theoretical foundation, and now I would like to take my learning to the next step by working with a mentor. The search for a mentor has proven difficult since there are no real conventional methods to finding one. I know you have come across many prominent figures within the trading community, so I was wondering if you know of any traders who would be willing to take on a hard-working, devoted, and smart student. I live in Orange County in Southern California, but would follow an opportunity if I believe in it. If you do not know of anybody in particular, but could point me in the right direction, that would also be greatly appreciated. I am sincerely sorry if this is a waste of your time, but I am trying to find the right guidance in order to help me find the path of least resistance in accomplishing my goal. I would be grateful of any suggestions you might have. Thank you very much and Happy Holidays, Brett

I don't consider your email a waste of time. That said, there is no short answer to your question. The old adage of knocking on doors - literally - is still true. I do have one lead that may provide education and networking. Attend a Managed Funds Association conference. Many of the men I write about attend and speak at these events. It's a great way to listen, learn and meet people.

A Story from An Old Bold Trader

December 13, 2006

A story from an old bold trader:

Hi Michael-I guess in this business there's a story a day if you don't live in a cave. Yesterday I had a visitor who wanted to come by and get my input on his trading. As you might imagine his trading has gone very poorly since his "advisors" have been quite negative on the US stock market and he continues to fight the existing trend which as of today at 2:00PM CST remains UP! He had heard through a mutual friend that I traded the S&P 500 Futures so perhaps I could give him some insight on what the market was GOING to do in the future. I quickly told him I had no clue whatsoever what the market was going to do and I learned long ago my opinions run from "wrong" to "really wrong". I went on to tell him my trading decisions revolved around what the market is doing now as well as what it has been doing recently i.e. "what's the trend?" Now I must confess as I have admitted to numerous times before I am not a long-term trend follower in the purest sense BUT I do trade with the trend be it up down or whatever. I have addressed that with you before. Anyway yesterday morning my plan for the day was to observe the S&P early in the day and watch for possible set-ups given my personal rules of engagement. Yes I approach trading on some level as a military exercise. I explained to my visitor that the S&P daily degree was still in an uptrend and my method always traded with the trend but I employ the shorter time frames to place my bets. This fits my personality as well as my tolerance for pain if you will. Sometimes I can tell you within 60 seconds if I have a good trade. Long Term Trend Followers can do the same thing but for them the confirmation of a good trade might take a few days but those who read this know what I mean. Sometimes you just know! On the alleged S&P mini crash of early yesterday-CNBC's definition not mine a set up presented itself in the Hourly Time Frame that gave me a go. I went to my trading platform and left clicked twice and I was in. My visitor suddenly got that "deer in the headlight look" and asked me what I had just done. I said I just bought five contracts of the S&P 500. I then very quickly entered my protective stop and looked at my visitor and said, "Now where were we?" He kind of babbled something about DAY TRADING was a losing cause which I totally agree with for MOST traders but not ALL traders. I asked him if he had a written plan and if so was one of his goals to follow his plan in his trading. He told me he gave up on written rules because he had so many rules they were confusing him. I have been there and done that. I asked him how much he risked on each bet as a % of his trading equity as well as how much of his universe of investable assets he had committed to trading. This time his eyes began to glaze over and I feared he might faint. After maybe 45 minutes the market had spurted to the upside and I calmly and without saying a word sold my position with a decent profit of say a 2-1 risk vs. reward. The second reason I sold was the FED was meeting and my PLAN was to be out of the financial related markets prior to 1:00PM period no matter what I THOUGHT might happen. My new friend said, "How you do that?" I said I had a plan formulated that as luck would have it worked this time with a witness. They don't all work that way but if 50% of 'em do I have a good life! He then asked me about my rules and my "system". I told him I did not have time yesterday but if he would come over Saturday I would go through what I do. He seemed very excited but then I had to throw in the caveat to my offer. I explained to him the pain and suffering I had gone through both mentally and financially to get where I have been the last couple of years. Some call it "Up Down Up Down". I told him what I did was ME and not HIM. I told him if he needed some help finding his ME I could refer him to some people who helped me three short years ago. This man has a law degree from Harvard along with a Masters degree in Tax Law. He is truly brilliant and he can't trade a lick. You see intelligence has its downside in investing. The young student you quoted has a professor that emphasizes my point. Although politically incorrect I wish you a Very Merry Christmas and a Very Happy and Safe New Year! Semper FI!, XXX

Lost in Space Professor

December 12, 2006

Some feedback today from a student:

I talked to one of my professors today. She is a very smart lady. Has a PhD in finance and used to work for a hedge fund here in New York. She used to be a professor at Baruch College. She [started] telling me that she is planning on moving away from trading options because they are too “risky” and she had lost a lot of money trading them. I went ahead and asked her, "Do you know anything about trend following?" She literary blew me away. She said to me and I’m quoting, “ Don’t waist your time money and energy, I don’t believe in that, it doesn’t’ work nor do my colleagues believe it either.” She did not give me a minute to talk about it. I then asked her what she though about Long Term Capital Management. She said, "They are very smart people. You can’t blame them for what happened." I said, "Who is it to blame?" She said, "It is the market. It was 'volatile.'"

Good to see our academic worlds are right there when it comes to knowing what is going on!

Price Movements Are Certain?

November 30, 2006

A comment sent in from an old pro trader today. It is a comment he sent to an associate that he thought my readers might enjoy:

"This morning as I do every morning I checked on the "opening call" in the Hog market. These calls are often accompanied by comments from brokerage house analysts and I found today's comments somewhat amusing. The comment was "price direction is uncertain due to the unknown direction of the cash market." While I am not an English major I would assume this comment on some levels infers there are times when the movement of cash prices are "certain"! As I always say I seem to learn something every day! I continue to believe the best way to make money is by simply "following" the trend no matter what time frame you choose to be involved in!"

Not Much Change at the Big Brokers

November 26, 2006

Feedback:

Michael, thank you for writing Trend Following! I read your book while I was interning on a sales & trading desk (sadly it wasn't required reading). Until I read Trend Following, I was always baffled by how analysts came to conclusions and how fundamentals were weighted and valued. Intuitively, I thought it rather absurd that the majority of analyst recommendations were BUY and that all SELL recommendations tended to come around the same time. I'm only 22 years old, but my goal is to learn as much as I can about trend following, practice it, hone my system, and eventually become a successful trend follower. Your website has been more helpful than my $200 college text books. Thanks!

While I appreciate the nice words, this email is really useful as a reminder about how little Wall Street has changed since the Dot Com Bomb 6 years ago. Here is a young guy making his way into the field and all he sees are people making predictions. And the only reason that the predictions never stop? The end user, the doctor, the attorney, the 'get rich quick guy' demands predictions. They love them! Human nature never changes!

Citadel: Rumors Unfounded

November 21, 2006

From yesterday:

Rumor has it that another major hedge fund in the U.S. is headed for a meltdown and reportedly may be behind the recent drop in the U.S. dollar as it allegedly diverted capital to cover losses in energy trades. Chicago-based Citadel Investment Group has denied that it is the hedge fund in trouble, telling The Wall Street Journal that the rumors concerning it are unfounded.

The California Garbage Collectors Union

Feedback from an earlier post:

Michael Covel, Wake up! Our government put Al Capone out of business and took over his business. It's called the protection racket! As a previous member of the CME I experienced this first hand. The head of the newly formed CFTC was a guest speaker at our annual members meeting. His speech was real short and real direct. I'll never forget it. He said, "The California Garbage Collectors Union" has a lobbyist in Washington D.C. and you guys aren't even in the directory and you had better get someone up there to watch your back! Less than 90 days later a bill was intro ducted in the house that if passed, would put the futures industry out of business in the U.S. Guess what! Magically a PAC was formed and money was sent to D.C.! O'yes, the "Shake Down" is what they really do and that's pretty much it, period! It's an art form with these guys. Don't forget, most of them are attorneys. Gary C.

Cocktail Banter

November 17, 2006

Feedback from last night about this podcast:

Michael, That cocktail quote is bang on. I was involved, as a partner, in a management company, which oversaw the commercial hedging side of a large group of hog producers (over 700,000 hogs per year in various weight stages). Our futures positions were initiated and exited based on a set of rigid criteria which included the bottom-line profit available (position placement) and hog/feed delivery (position removal). We basically applied a 'hog crush' to the operations production; the more profit, the further out we went. We had to deal with all of the common fundamental questions of where we saw the market going etc. etc. We became a broken record constantly repeating "When we get this much profit we put this many positions on ..." At some point the person's eyes would glaze over and the conversation would dry up. I think it's just human nature for people to want the fundamentals. It gives them a sense of accomplishment -- however false. Regards, Cliff G.

A Review From Mars, Part Deuce

October 30, 2006

Feedback in last night:

In "A Review From Mars", Mr. Covel artfully dodged to address the real issue with his Trendfollowing advocacy: survivorship bias. Unless Mr. Covel can convincingly demonstrate that his profiled trades are not just "lucky monkeys", I have a hard time suspecting that Mr. Covel is not just selling snake oil.

I believe that the notion that all trend followers who win are lucky survivors is not accurate. Sometimes those so love in math forget that you have to wake up each day and put your shoes on...and go make it happen. There are concrete reasons for failure and concrete reasons for winning. If we go down the logic I think you are heading, you would argue all great achievement in life is the result of the winning lucky monkey.

More feedback:

Michael, I think the point at which critics of your book and trend following in general get mixed up is the fact that you make the methodology of trend following sound so simple, especially in relation to other strategies such as fundamental analysis. The fact of the matter is that it is relatively simple, but that's not the problem. What they miss is that trend following like any other successful trading strategy requires sometimes enormous amounts of discipline, patience, and persistence, and not everyone has it. Anyone who has spent any significant amount of time developing, testing, and/or trading a trend following strategy can see the potential of such a strategy (my guess is that your critics haven't done so). However, these strong results in simulation or in 'paper' trading mean nothing without the qualitative tools to make it happen consistently in 'real' trading. The problem is it's so much more comfortable for your "lucky monkey" critic to use and blame someone else's blackbox strategy (fundamental analysis) when it fails, than to know that success or failure ultimately rests in your own hands. Keep up the good work.

Huh? Part 2

October 29, 2006

I recently posted a reader comment and my feedback. That post generated this response:

"In your answer to the gentleman or lady regarding fundamental vs trend following trading, you berated him/her for seemingly knowing the difference, but hedging. You stated that your task was to educate. What education did you set forth? I must have missed it."

He says trend following works, says trend following performance data is accepted, then says you need fundamental trading too because reality is far more complex than any one model. Isn't that a rather stark contradiction? Isn't the education the fact that this view of adding fundamentals to trend following is not doable except by the lone superstar here or there?

Why Fundamentals? #2

October 27, 2006

Feedback from Nick Glydon:

"I believe people still "prefer" fundamentals because they are striving for intellectual stimulation. You don't sound very interesting at a cocktail party if you say Glaxo is going down "just because it is", whereas if you can talk about cancer drugs, etc, etc, blah, blah people think you are interesting. Goldman's salespeople can talk for hours about cancer drugs, Chinese GDP, and US housing data - they too like to seem "intelligent." You have to ask "what are you trying to get from markets, money or perceived intelligence?" By the way, I am an technical analyst working for an institutional broking firm in Europe. Plenty of clients do follow our trend following advice, but very very few follow it exclusively - most try to "marry it" with fundamanentals of one sort or another. I also believe trend following works better in equities than in most other markets, as there are very many individual stocks which double, and double again - it doesn't happen that often even in commodity markets. I've been a trend follower for 20 years! I like your book by the way, but the one I give the most to clients is still the O'Shaughnessey one - proves better to my audience that momentum matters. Cheers, and keep up the websites - very useful stuff."

Huh?

October 24, 2006

Feedback from a reader who I have been debating with in email:

"Nobody disputes the virtues of trend following trading. Its performances are clearly recognized. The point here is that computer trading models sometimes fail. You recognized that too. Reality is more complex than any model. The problem with gold is that it is a lot influenced by political and economic factors. Obviously these factors are hard to quantify in a model."

No knock against this man personally, but he has no clue. On one hand he is admitting the viability of trend following, but in the next breath saying you need a fundamental understanding too. I say, "Shit or get off the pot." These two strategies don't marry successfully. You are either or.

But perhaps the reason I find his post so useful is that he truly believes he gets what trend following trading actually is, but within a few more words, demonstrates his lack of any conceptual understanding. I post not to pick on him, but rather to educate someone else who might be confused as well.

More Faulty Logic

October 22, 2006

This post brought in this feedback attempting to explain why certain opinions should be valued:

"Well, given that some hedge funds go bust, his message is quite credible. When he backs up his opinion with Mr. Volcker's opinions, he gains additional credibility."

'Opinions' mean more than decades of performance data by systematic traders? Explain that logic to me.

New White Paper

October 12, 2006

Here is a white paper (PDF) from Cambria Capital titled "A Quantitative Approach to Tactical Asset Allocation." Thanks to Mebane T. Faber for the contribution.

The Questionnaire

October 10, 2006

Feedback from an old pro trader from Commodities Corporation:

Hi Michael - A very good friend sent me a questionnaire over the weekend regarding a proposed upcoming "advanced" trading seminar he is putting together for down the road...As I have said before and I will say again while many methods work I have yet to see any one method work for EVERYONE...Anyway at the end of the questionnaire my friend asked for a brief discussion of what I personally thought every successful trader had mastered in becoming successful. To follow is my response in the order I believe of their importance:

#1. Have a written non-subjective money management system. I personally never ever risk more than 1% on a bet and frankly risk less on most of my bets. Over my 30+ years of trading I have found there is very little correlation to the amount I initially risk in a bet and the amount of profit I gain on a per contract basis. I have no clue what the Amaranth boys were betting in the Natural Gas fiasco, but I think it is safe to say it fell in the 10-20% range. Last time I calculated betting 20% per shot it ends up at zero pretty quickly.

#2. I think prospective traders and even seasoned traders need to learn how to design a trading method that fits their own individual personality type. It is my belief that a Type A personality will find position trading quite stressful while a less aggressive personality will have a hard time swing trading. At the end of the day they may both work out from a profitability point of view IF your personality fits your method. I think it is quite possible for the very same trading method to be a big winner for trader A and a big loser for Trader B. How could it be any other way?

In conclusion it is possible to start out risking 1% and end up losing 3% just as it must have been possible to start out risking 20% and end up losing over 60%. They are just numbers!

Feedback on Black Swans

October 07, 2006

Cole Wilcox of Blackstar Funds LLC added a comment on this post:

Some concepts that no one ever talks about, including the trend following managers themselves is that there is a very fundamental reason such strategies work. Every trade in every market is a risk transfer process. In the stock market, over the long term the risk transfer is almost always from seller to the buyer, in commodities it changes depending on the term structure because of the flip flop of premium or discount from front to back month contracts, which determines if you are getting a positive or negative risk premium or roll return. The buyers of risk in commodities, who can be either long or short depending on the current term structure require a risk premium to continue to participate over the long run. In commodities you have a risk transfer process from the hedger to risk taker or speculator. Hedgers are buying insurance, which requires them to pay for it. The price of this insurance is the "risk premium" which they must pay to the other side of the trade (speculators). On average trend following works because the trend follower is collecting the risk premium from the hedger because they are usually on the other side of the hedgers trade. My point is that insurance is not free, and this premium is a major factor to why trend followers have been successful in the past and in many cases should be expected to be successful in the future. I view trend following as an insurance business, who's job it is to collect risk premiums from hedgers and manage portfolio risk at the same time as to survive to continue to collect future risk premiums.

More Amaranth Feedback

September 24, 2006

Brian Cypher writes:

"The reason I wanted to write to you is your posting on Amaranth. When I read that, I thought “Amaranth must have made a huge directional trade or continually scaled into long positions as gas went down. They totally disregarded any portfolio risk analysis measures.” I couldn’t believe that a firm like this, which had attracted “smart” money, could make such a grossly over-weighted trade not only in monetary terms but in ego as well. Even if they would have just limited their total portfolio exposure to 5% (approx. $475 million) to the Natural Gas market, the loss would have been limited to that or at best 50-60% loss of that 5% or $250,000,000 or so. I don’t get it but then I do and it makes my personal goals that much more attainable. This is just one more example of how trends will continue to persist in markets."

Amaranth Feedback

From a reader:

"Strangely now Amaranth is saying they are "eliminating energy trading from our strategy". I wonder how that will help? Wouldn't the same style of crazy leveraged bets be ruinous in another market as well? Amaranth went on to say "liquidity dried up so quickly that the fund was not able to unwind its energy positions." WHAT?? NG contracts are not liquid? Something is wrong here. Could Amaranth have had such a large position that they were a significant percentage of the entire open interest? Michael, I think this is a better chart than the one you posted on your blog."

"It clearly shows a downtrend in 2006. Why would somebody bet that prices would go even higher when they peaked last year and hadn't really come off that much since? That is, if one is looking for weather correlation, shouldn't there be a tighter spike with rapid decline after Feb? To me, if you weren't in on the 2005 uptrend, it appears that one should have put on a small short position in Feb 2006 with a wait and see attitude and a stop order. Was Amaranth buying all the way down expecting an even higher price than December 05 peak at $11.20? Maybe hindsight is 20/20, but it sure looks like a downtrend to me."

Why Can't You Add Fundamentals?

September 16, 2006

Last Friday after giving a presentation to a mostly fundamental crowd, there was a question and answer session. One of the questions was essentially, "That sounds very promising, but why can't you add a fundamental perspective for entries and exits on top of the trend following approach and do even better?"

The question was not meant to be negative to trend following as the questioner seemed genuinely interested in the subject, but rather I thought it was an attempt to cling to what someone knows best. I have yet to find any mechanical trend follower with a discretionary fundamental overlay. The closest I would know of someone who fits that category would be Paul Tudor Jones.

"I Made It Up"

August 31, 2006

Michael Gibbons of Gibbons Trading adds to the "price":

Michael,

I stopped looking at news as something important in 1978. A good friend of mine was employed as a "reporter" by the largest commodity news service at the time. One day his major "story" was about sugar and what it was going to do. After I read his piece, I asked: "Gary, how do you know all of this?" I will never forget his answer...he said: " I made it up."

I have looked only at price since 1978.

Best,
Michael Gibbons

Don't Take the Bait

August 30, 2006

Hi Mike,

Regarding your recent post about the trader who claims to be a trend follower, but then tries to bait you into claiming something negative about trend following – I’m not sure what to make of these people, but, as a trend follower, I am pretty happy they are around – after all it’s their doubts and fears that fuel my next potential gains – it’s their indecisiveness, their need to change, find the next new system that “works” – it comes back to human nature and discipline – the need to be right is so strong in so many – and the discipline necessary to stick with a sound trading system is so difficult for so many – otherwise your “hall of fame” of trend followers would 40 pages long – all I need to do is look at the charts for the past year – hmmm – copper – got it – trend – check – silver – got it – trend – check – sugar – got it trend – check and look at that – sugar again right now has been trending down – got it – trend – check – oh yeah – orange juice – and ummmmm – oh yes the 5 yr note – cattle – hogs – there have been and are trends going on right now – I have 14 positions on and some of them are into a trend and others may be starting a new trend and others may turn around for losses – I DON’T KNOW – but I do know my downside on each of these positions and I do know that I had some tough months of returns in may, june, july – and I am relatively new to this – my longest account has only been active for 14 months – is trend following dead? – If trends cease to exist then markets cease to exist, then there is no game except selling volatility, then everyone gets into that and their heads get taken off and then when everyone walks away, the trends come back and over and over – supply and demand – cycles- get back in – who knows – its uncertain – embrace it! - I have a ton to learn and that will always be the case and no matter how much I think I know, I will never know where the market is going … but I will know what to do when it gets there (I think that was a Bill Eckhardt line, in some shape or form).

Thanks,
Michael Marchese

Charlie Rose - E.O. Wilson & James Watson on Charles Darwin

August 24, 2006

This video is unrelated to trading. It is an hour on the life and work of Charles Darwin with James Watson, chancellor, Cold Spring Harbor Laboratory, and E.O. Wilson, professor emeritus, Harvard University. One of the best one hour pieces of video I have seen in years. Free on Google Video.

Henry Luk from New Zealand

August 21, 2006

Some feedback about a recent post:

Hi Mike, I just read your "The Elephant in the Room" post. He didn't grasp the concept AT ALL...People love to predict. People love to be right. People love to hang on to the past. People love to control EVERYTHING. You see it everywhere. Not just in the market. People lose their loved ones/make mistakes and they live with guilt and regret and hang on to it forever. People think they can control certain things, but it turns out they can't. People hang onto losing relationships for years. That's human nature. Trend following teaches that this is NOT the way. Because if we do this way, we simply live in pain forever, everyday, every second. And why choose to live in pain? We have two choices everyday when we roll out of bed, live in pain or live in happiness. I would like to live in happiness thank you...'Trend' does not exist. It ONLY exists in hindsight on the chart, Trend followers do NOT follow trend. "Following trend" has the smell of prediction in it. Trend followers simply just follow "the present". We buy because the market is going up NOW. We sell because the market is dropping NOW. We have NO IDEA if it will keep rising the next second. We simply don't care! We don't need to care because of money management strategies and "homework" on system design and back testing, etc. We should live our lives in the same way. There is only present. There is no past. The past is gone, and the future hasn't happened yet. You can make love to your wife tonight, but that doesn't mean she won't divorce you the next morning. You lost your loved ones in the past, but that doesn't mean you can't find a happier way to live now."

Old Pro Insight

August 16, 2006

The feedback below is from an old pro trader. The excerpts he sent and his feedback about those excerpts are listed. As an FYI, he knows Jones, hence the lack of formality:

***

Hi Michael, I thought it important to share some conclusions i have been able to reach from my latest batch of newsletters and research in a few markets I follow [that came across my desk].

U.S. stocks: "We remain long term bearish but short term friendly" to this ongoing developing trend. "If the market goes below 11130 basis the cash dow it is going down otherwise it could easily rally to 11400 or maybe even 11700."

Boy is that some good insight.

Sugar: "We remain committed to the bull camp in october sugar and are currently looking for a place to ad to our existing long position at 16.42. Some october calls are reaching extremely low prices."

No shit sherlock! What did Paul say about "losers averaging losers"?

And finally my favorite: "Risk management is the most over rated ingredient in successful trading. We never recommend risking more than 25% of one's trading capital per trade. Great traders just know when to step on the gas."

J.T. McPherson Asks Questions

August 15, 2006

J.T. McPherson sent me in the following article in 3 parts:

Part 1
Part 2
Part 3

His hand written notes are just the types of questions I would ask!

Feedback from Old Pro

July 20, 2006

I have received feedback over the months from an old pro in the trading industry. I share some excerpts below:

Your Boone Pickens story reminds me of how lucky I am to have met some of the great ones over the years and Boone was one of them. In the mid eighties one of my trading mentors was xxx from xxx. He died a few years back but had accumulated a small fortune from trend following and his oil business. One of his neighbors was the legendary Oil wildcatter xxx. [He] had sent his Lear 25 to [my home town] to ferry me back to xxx for the day...[they] told me Bob Mosbacher and Boone Pickens were in Town visiting and we could have lunch at the country club with them if I liked. Boone was as down to earth as any man I ever met and Bob Mosbacher was a peach of a guy himself. Bob is a Texas wildcatter cut from the same cloth as Boone. Multi-million dollar deals done on a handshake type folks. I also remember Mrs. Mosbacher who was very easy on the eye and a real down to earth lady. All these guys were successful in business and trading and the thing that stuck with me through the years was how nice they were as people. Boone treated me like we were old friends I guess partly because of my relationship with xxx but he seemed truly interested in my plans to become a CTA, which I did in 1986. I guess when I met these guys the oil business had been terrible and I bet they were all broke or close to broke. Boone Pickens told me he had been broke before but never between his ears. I would relate that to some of the ups and downs we go through as traders but it is important to never be broke between one's ears. [From my mentor] I heard several truisms that have stuck with me over the years.

#1 They don't dedicate monuments to crowds.
#2 A man that won't lie to his wife is no gentleman.
#3 Brokerage houses: they may be "right" but I am the one making the money.
#4 You cannot trust a man with no bad habits or a bible on his desk. If you see a picture of Jesus in his office run. xxx was a Christian but he did not trust those who wore it on their sleeve.
#5 I smoke short camels because I can smoke them faster. Of course xxx died of a heart attack brought on by his smoking habit.
#6 If you want to know what a market is going to do just put a weekly chart up on the wall and back away a distance. Whatever the market has been doing it will keep doing until it does something else. We would call that a trend although I never heard him use the word "trend" one time in 15 years but he was a trend follower.

Watch CNBC & Learn!

July 11, 2006

Feedback emailed in tonight:

I just recently got a job working for an investment bank here in New York. During my interview I asked the senior vice-president of the firm what methods they use to determent what securities to recommend for their clients. He said to me, "we will show you how to interpret what CNBC is talking about and how to find out what other major firms are doing." How can anyone rely on this kind of advisement?

Smaller Minimums

June 25, 2006

Feedback on smaller minimum trend followers:

Hi Michael,

I'd like to offer a response and an option to Derek H. who was your first e-mail message today. I represent a fund by the name of Alexys Partners which is managed by Howard Cunningham of Cunningham Asset Management, Inc. Howard mentored with Ed Seykota for two years (1998-2000) and is a true trend follower. Alexys Partners started in Feb.'05, has a low minimum of $100K and is available only to accredited investors. Alexys Partners is listed with Hedgefund.net. Please feel free to have Derek contact me at the address below. Michael, I also want to say that I really enjoy the work that you do. I would attribute my appreciation and understanding of the trend following discipline to both yours and Howard's efforts. I've read your book and now give it to every prospective partner of our fund. Thanks and keep up the good work!

Best regards,
Dave

David B. Root Jr, CFP
CEO
D.B. Root & Company
Financial Planning
3100 Koppers Building
Pittsburgh, PA 15219

This is not a sales pitch from me as I don't know David. Just seemed like good information to pass along.

Why Trend Following Is Not Main Stream

Feedback from a reader:

Hi Michael,

I bought your excellent book and it is really changing the way I think about speculating in stocks. I wrote a newsletter today which includes some reasons why I think trend following can't go mainstream or why it isn't right now...ssome theories and reasons why trend following is not a main stream trading system:

1. Totally ignores fundamentals. So a trend follower could be shorting a stock that just experienced record earnings or he could be going long a company with no profits and tons of debt. This goes against what you have been brainwashed by the media.

2. Radically simple. Just tracking price movements seems way too simple to make money in the markets. We are brainwashed that you must do hours upon hours of "due diligence" before you buy a stock. But the problem is that in reality, companies with terrible fundamentals go up and many companies with great ones go down.

3. It's a trading system that requires strict discipline. Again, media recommends "buy and hold" with no exit strategy whatsoever. And if you're wrong, you should buy more because the stock with those great fundamentals you bought has just gotten cheaper. Trend Following is a numbers game too where only 40% of your trades will be profitable. So yes, 60% of your trades will lose money but as long as you are disciplined and cut your loses short you can still do very well in the markets.

4. It recommends going short as often as you go long. People who short stocks are portrayed as demons in the media. Shorting is seen as evil because shorting bets on stock prices going down and nobody wants that right?

5. Doesn't require the whole analyst/glamour of the financial industry. If people learn that they can trade successfully by following queues from simple stock charts and moving averages, then they don't have to read CFA's research reports. They don't have to watch ROBTV or CNBC to hear some fund manager discuss why he thinks stock X will go up and why you should buy it. Think about all the very high paying jobs that could be potentially eliminated if every investor just followed the trends…

That's just the way I see it anyway.

Keep it up,
Mike

Cramer Blog Piece

June 15, 2006

Some feedback on Jim Cramer:

"Michael, I am not sure if you have already read this (link to blog), but I think you will find it of interest and a bit humorous too. Any thoughts you would like to share are welcome. Kind Regards, Muaad"

That is nice piece of fun writing, but did the writer need a bear market to start to doubt the wisdom of relying on Cramer's stock tipping?

Not at This Time

June 08, 2006

Some feedback from a reader explaining why trend following is not wise today:

"The problem is you will spend a lot of time and effort just breaking even on what are presently very stagnant markets. While it is true one might make 50% or more by joining the short sellers every time the markets panic, if one is uncomfortable with the added risks of short selling, one must find at least one home run long position once in awhile, e.g. 50%, 100%, etc. [I pick 100% just as a round number large enough to overcome the retarding effect of position sizing on that rare home run you might get by trying to trend follow in the chop.] What I am suggesting is that markets today are so correlated and so stagnant that you cannot find any long investment that will stand out far enough to get ahead of all the losing trades one has to endure in trend following this sort of market. Markets are very choppy and increasingly correlated because of globalized trading. "Low opportunity" as you say. I guess this is my point and criticism of trend following as a useful trading tactic at this time."

Thanks for the feedback. Comments:

1. Which 'markets' do you mean?
2. How do you define 'at this time'?
3. How do you explain the success seen here: www.jwh.com, www.wintoncapital.com, www.grahamcapital.com, www.chesapeakecapital.com, etc.? Are their results just 'luck'?

"Narrow Minded Jackass" Follow-Up

June 04, 2006

Recently I had a reader call me a narrow minded jackass for my $1 contest. That comment brought this rather sarcastic feedback from another reader:

"In order to prove that 'predicted technical analysis does not work' , we need to define 'predicted technical analysis' and 'work'. Does the common technical phrase 'a flag always flys at half mast' mean that if you happen to pick the right breakout from the flag and it travels exactly as high as the run-up to the beginning of the flag, then I guess it 'works', depending on your measurements and of course adjusting for a little bit of slippage and such, and you know if it comes within 1 point of your target well that's close enough, right? Or maybe it's that 5th wave in the Elliot wave format that pushed up exactly 0.618x the length of the 1st plus the 3rd wave, or is it just the 3rd wave, I forget? Oh yeah that head and shoulders, you know that's a sure winner because when that breaks down from the right shoulder you know for sure that the market will dive to the exact length of the measurement from the base to the peak of that head and shoulders. Oh yeah, I just love trading the support and resistance bands because they are always spot on - so predictive like shootin fish in a barrel. This is why trading is so blessed easy it almost pains me to take so much money this way- you know that MACD, it's like reading tomorrows Wall Street Journal - yeah there's no way you'll ever prove this stuff doesn't work, I mean just look out your window there are guys and girls drivin Ferraris all over the world because of all the riches they have claimed from predictive technical analysis. Good luck with this one - oh hang on a sec, I've gotta take this call from Nostrodamus, he's gonna tell me what orders to place Monday morning. Just another narrow minded jack ass [here]."
Mike Marchese

The reader who originally wrote in with the 'jackass' comment saw the above response and responded:

"Your response to my comment that you are a narrow minded jackass not only reinforces my belief but tells me that you are also delusional. I recommend you see a Psychiatrist."

This subject appears exhausted!

Best Answer for $1 Contest

Best feedback so far on my tongue and cheek $1 contest:

"Michael, That chart looks like my Uncle Vinny's EKG after a big meatball parm and liter of Coke. CFA = Constantly Fumbling for Anwers. My guess is as good as any - literally."
MRM (Martin Trading)

$1 Bet Continued...

June 02, 2006

Feedback in today:

"I read about your $1 contest. I've decided to give you 1 million dollars if you can prove that predicted technical analysis does not work. P.S. You are a narrowminded jackass!"

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