Trend Following Simplified

The result of an eight year study, Michael Covel’s book “Trend Following” challenges conventional trading wisdom. Its only drawback is that it does not delve deep enough into the subject.

As the phrase “trend following” suggests, traders employing this strategy seek to capture the majority of a move – up or down – for profit. The system works for all major asset classes – stocks, bonds, currencies and commodities.

Using an approach similar to Jim Collins’ “Good to Great”, the author developed a series of questions. He, then, gathered data by interviewing successful practitioners of the art – Jonathan Hoenig, Ed Seykota, Bill Dunn, John Henry, Keith Campbell, among others. Only then does he discuss the points made.

The book’s weakness is its failure to address the fact that every system eventually breaks down. It is not until late in the book that the author casually addresses questions like:

1. What to trade?
2. How much to commit to each trade?
3. When to buy or sell?
4. When to close a losing position?
5. When to close a winning position?

Each is a critical question. Yet none of the author’s experts is asked to address them in any detail. Readers should be not surprised by these omissions. They represent closely guarded secrets that even the most open traders hold close.

Questions I would have loved to seen addressed are:

1. When does my model require modification?
2. How do I develop a mindset that allows me to trust a model I know will someday be outdated?

If you are new to the world of trading, this book is a satisfactory introduction to trend following. If you are not, do your self a favor and save your money. ( )

Michael W. Covel challenges much of the conventional trading wisdom with his book Trend Following.

Focusing on five truisms, Covel posits trend following is the best strategy to make money. All markets trend: up markets, down markets, commodities, stocks, bonds, currencies. The trader who captures the majority of those trends profits. Those who do not, do not. It is a simple message. Covel delivers it clearly, simply and convincingly.

In doing so, he acts as a journalist. Driven by curiosity, he pursues the truth to its logical conclusion. Trend followers tend to be a low profile, if not, reclusive group. By doggedly seeking answers to his curiosity results in commentary and more than 30 years of data to support his conclusions.

Trading is a zero sum game. Anyone who is consistently successful, as far I am concerned, has something to offer. Covel has done what I do not have the patience to do: sought these people out and told their stories.

Sure, the book lacks point-by-point formulas. It also canonizes John Henry and Bill Dunn. If you do not want to read that, it is organized with options. The reader has access to:

* Traders' personalities.
* Their performance.
* Their psychology.
* Trading systems.

The careful reader will profit far more than the mere cost of this volume. Personally, I drew five lessons from my read:

1. It does not matter what one thinks; only the market matters.
2. Trading is a probabilistic business.
3. If it matters, it can be measured.
4. One does not have know when something will happen to know it will.
5. Trading means losing as well as winning.

That list contains no new revelations for me. However, I cannot read it enough. By re-enforcing those observations Michael W. Covel penned a book with lasting appeal.

Penned by the Pointed Pundit
December 30, 2007
5:25:40 PM ( )