Ep. 558: A Trend Following Back and Forth on Trend Following Radio

Fun Picture Serious Subject
Fun Picture Serious Subject

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Michael Covel and Larry Tentarelli break open the newest edition of Trend Following and discuss details of the 5th edition. It becomes a challenge to continually “up the ante” and Larry confirms that Michael hit the mark on this edition. The book is double the size and broken down into three sections: Principles, interviews, and research. Michael and Larry discuss: Dunn vs. S&P, mechanical trading, fundamentals, Warren Buffett and his drawdowns, 200 day moving averages, Nate Silver and Harry Denton on prediction, large fund trading vs. small fund trading, John W. Henry, chasing tops and bottoms of the market, Paul Tudor Jones, price action, process and outcome, CNBC and Joe Kernen, and much more.

In this episode of Trend Following Radio:

  • Is trend following dead?
  • Warren Buffett
  • Catching the bottom of the market
  • Prediction as a business
  • Price action
  • Process vs. Outcome
  • CNBC
  • Fundamentals

“Not losing money is a great trading strategy.” – Michael Covel

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Trading Food for Thought: May 25th Edition

Ep. 557: Eric Barker Interview with Michael Covel on Trend Following Radio

Eric Barker
Eric Barker

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Eric Barker is founder of the blog, Barking Up The Wrong Tree. He provides science based answers and expert insight on how to be awesome in life. His newest work is “Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong”.

What happens to valedictorians after graduation? Valedictorians are great at following rules and not breaking outside the box. This gets them far in school but not too far in the real world. Studies have proven most who excel in school end up in structured non-pioneering jobs. Most entrepreneurs don’t follow the rules of school or society. They are also generally classified as creative people and therefore have huge obstacles to maneuver through. Most teachers say they love creative children but research shows those are the students hated most. They don’t sit still or follow direction well. Luckily, In today’s era it is easier than ever for those creative types to succeed. The internet has given ideas the opportunity to spread quickly and easier than ever before.

With ideas easily being spread, so are negative (and positive) influences. We are always more influenced by those around us than we realize: work colleagues, friends, people at social events… whoever you choose to surround yourself with will have a tremendous influence on your life.

Learning to accept failure is just as important as surrounding yourself with the right crowd. New opportunities and innovation springs from a person’s ability to fail. Doing everything the same way every time, will always get the same results. Pushing boundaries is critical otherwise you’re not working toward expertise, you are just practicing redundant behavior. Everyone loves to hear about the 25 year old billionaire because it doesn’t seem like there was much work involved but when you peel back the layers, you see the grit necessary in getting to their success.

One example of grit and sustaining the right mindset is a research project Eric did with Navy Seals. What stood out the most was their optimism. They have short term focus that keeps them optimistically moving forward. Personal, persistent and pervasive are the three P’s that if kept positive, you can produce optimism and grit. Navy Seals don’t look at a 60 day program and say, “I can have no sleep or food for 60 days.” Instead they say, “I can get to lunch” and then after lunch they say, “I can get to dinner.” It is a day-to-day survival mode rather than big picture. The big picture is too daunting.

Michael and Eric end the podcast discussing what Eric calls “the buffet.” How close are you to buffet food? How much are your friends eating? Are you facing the food, or are you facing away? All these factors play a part in how your life is modeled.

In this episode of Trend Following Radio:

  • The entrepreneurial feeling
  • What makes valedictorians succeed
  • Filter leaders
  • Obstacles for creative people
  • Structure of story telling
  • Failure tolerance
  • Creating meaningful mentorships

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Seeing the Trend Following Light in Life and Trading

Feedback in:

Dear Mr. Covel,

My name is [Name]. I’ve been wanting to write to you to express my gratitude for what you do, so here it goes.

A little background on me so you know where I’m coming from. I live in [Name] and I’m a 27-year veteran officer of the [Name] Police Department.

Like most people I know, for the majority of my life I’ve been financially illiterate in regard to anything related to the stock market. I always found financial matters boring, therefore I paid little attention to them.

My interest perked up a bit while I was in the police academy. We had a one hour class one day with an instructor who discussed participation in the department’s 457B plan. Charts were passed out which graphed how much money we could expect at retirement when projecting an annual amount contributed combined with how many years in service times an average expected annual yield. When I looked in the lower right corner of that graph and saw that a long career with a maximum payroll deduction could exceed a million dollars, that was for me! I signed up immediately and have been maxed out in my 457B plan for most of the time since that eye-opening day.

My financial literacy at that point in my life was this: just pump money into my retirement plan, then when I retire I’ll be set. Maybe I’ll even be a millionaire. I still hadn’t fully recognized then how my retirement plan hinged on stock market performance.

Fast forward to about seven years ago and the purchase of my first iPhone. With my new-found interest in Apple I read a news article which related how Apple’s stock price had, over the course of a few years, increased over 30,000%. That was simply staggering to me. If I owned $5,000 worth of Apple stock at its lows I wouldn’t have to wait until I was retired to be a millionaire. With that revelation, my interest then turned to the stock market.

I had long since established a practice of determining, pursuing and achieving goals throughout my life, so I confidently embarked on a goal of becoming a successful trader/investor. With knowledge gained through my studies, it was only then that I began to grasp the mechanics of my retirement plan. Understanding for the first time then how my savings had been cut in half twice – the 2000 and 2008 bear markets – with my being virtually oblivious to it during those times sickened me. I’m grateful that I finally woke up and can confidently manage and safeguard the retirement accounts for my wife and I now that we are close to retirement. Up until recently it has been sheer dumb luck that we have benefited from the market’s current run to all-time highs.

Back to the trading. It has been a challenge, to say the least, but now in my sixth year I am finally practicing a strategy that works along with the discipline to execute it. A large percentage of that results from a handful of traders such as yourself who have shared what they’ve learned so that “home gamers” like me can find the means to succeed. I don’t think anyone who has studied or trained for a career in the financial world of trading truly understands the myriad of pitfalls novices face, or if they do they likely exploit them for their own gain. Fair enough, but it’s easy for me to see why most traders give up, blow up or wash out. I’m glad to count myself among the minority who have navigated successfully through the minefield where so many others have failed.

“Trend Following” has long been on my “must read” recommendation list. Congratulations on the publication of the new edition of your book; it’s a beauty. My old version is heavily highlighted, and I expect my new copy will be as well.

I’m also an avid fan of your podcasts. From those, and your writings, what I appreciate above all else is your genuine sense of honest, no bullshit, tell it like it is approach to getting your message across to those eager to listen and learn. Your podcasts are light years ahead of any others I listen to because you actually engage your guests with questions and comments pertinent to what they’re talking about, making them more enthusiastic about how they’re responding. Nothing ever comes off sounding scripted, and that’s damn refreshing and entertaining.

The main reason I mentioned that I was a police officer is because of an interesting parallel in regard to each of our paths through life. I can say that after 27 years of working the streets of [Name] there is a world which exists all around us which most people aren’t even aware of, and probably never will be. I tell family and friends true stories of experiences I have, and even as I’m speaking to them I can see the expression on their face belies the fact that they’re not fully believing what I’m saying, or at the very least I’m exaggerating. My experiences are often too contrary to experiences they’ve had in the world they live their lives in. They have no reference point to fathom the extremes of the world I work in.

I’ve never stepped foot on Wall Street, but the parallel I see between you and I is that, with my own unique perspective in mind, I can more readily believe and accept your no bullshit, tell it like it is interpretation of what really happens in the real world of Wall Street which most people aren’t aware of, and probably never will be. What you write and what you say sidesteps the sensationalized media noise of CNBC, et al., and shines a light on a world so contrary to those who accept CNBC noise as gospel that they can’t or won’t fathom the possibility of anything other than what they’re being spoon fed as truth.

The insight of real worlds existing beyond the worlds most people see is something I think we have in common, in our own ways. Accepting the wisdom of your unique perspective of the trading world has helped me greatly in garnering the measure of success which I’ve achieved thus far. For that, I thank you.

Thanks for taking the time to read this. I know it got a bit lengthy, but I guess I got on a roll.

If you’re ever in [Name] I’d be delighted to meet up with you somewhere for a bite to eat, or just to shake your hand and thank you in person for all you’ve done for me, if possible.

Thanks again!



Thanks! Awesome feedback. Made me smile.

Ep. 556: R.P. Eddy Interview with Michael Covel on Trend Following Radio

R. P. Eddy
R. P. Eddy

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R.P. Eddy is an American businessman, venture investor, former U.S. government official and former U.N. diplomat. He is currently the CEO of Ergo, a strategy and geo political intelligence firm. R.P. is also co-author of “Warnings: Finding Cassandras to Stop Catastrophes.”

How did Fukushima happen? There were lots of Cassandras who knew there were issues. There were warnings thousands of years old, along with experts telling officials not to build the nuclear plant so low. Hurricane Katrina in the United States is another example where there were Cassandras who had the foresight to fix potential disaster, but were ignored. What would have happened if there was foresight to Saddam Hussein and the Kuwait invasion? A man named Charlie Allen had that foresight but was pushed aside.

With such credible people having undeniable evidence being ignored, this brings up the question: How does a dynamic change in government happen? It doesn’t. R.P. did a study finding that 1% of the public think for themselves to make informed decisions. As people turn on the T.V. or surf the internet they find biased information. It’s hard to sit down, find unbiased information and make opinions of their own. When we have Cassandras who come out with real data and information to make changes that can save thousands, it is hard to decipher if they are chicken little or the real thing.

R.P. profiled in depth Cassandras ranging from: Fukushima, Katrina, Madoff, 2008 collapse, the rise of Isis, and the invasion of Kuwait. In every instance the Cassandra went to the decision makers and asked the question, “Why are you ignoring all the data?!” The more outlandish the warning, the easier it is to be ignored. People who understand what is wrong with our brains, the ones who doubt themselves and double check data are the traders and leaders who thrive. Michael and R.P. end discussing nuclear weapons theory, North Korea, potential Cassandras, India vs. Pakistan, and why we should all stop and reassess the information that is fed us.

In this episode of Trend Following Radio:

  • Indicators and warning
  • Analysis and foresight
  • Pax Americana
  • Fukushima
  • Corruption vs. competence
  • Bernie Madoff
  • Black Swans
  • 2008 collapse

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Trading Food for Thought: May 21st Edition

2017 Trend Following Table of Contents

Foreword by Barry L. Ritholtz

I. Trend Following Principles

1. Trend Following
Winning versus Losing
Investor versus Trader
Fundamental versus Technical
Discretionary versus Systematic
Hiding in Plain Sight
Change Is Life
Follow the Trend to the End When It Bends
Surf the Waves

2. Great Trend Followers
David Harding
Bill Dunn
John W Henry
Ed Seykota
Keith Campbell
Jerry Parker
Salem Abraham
Richard Dennis
Richard Donchian
Jesse Livermore and Dickson Watts

3. Performance Proof
Absolute Returns
Volatility versus Risk
Zero Sum
George Soros
Berkshire Hathaway

4. Big Events, Crashes, and Panics
Event 1: Great Recession
Event 2: Dot-com Bubble
Event 3: Long-Term Capital Management
Event 4: Asian Contagion
Event 5: Barings Bank
Event 6: Metallgesellschaft
Event 7: Black Monday

5. Thinking Outside the Box
Billy Beane
Bill James
Stats Take Over

6. Human Behavior
Prospect Theory
Emotional Intelligence
Neuro-Linguistic Programming
Trading Tribe
Curiosity, Not PhDs

7. Decision Making
Occam’s Razor
Fast and Frugal Decision Making
Innovator’s Dilemma
Process versus Outcome versus Gut

8. The Scientific Method
Critical Thinking
Linear versus Nonlinear

9. Holy Grails
Buy and Hope
Warren Buffett
Losers Average Losers
Avoiding Stupidity

10. Trading Systems
Risk, Reward, and Uncertainty
Five Questions
Your Trading System
Frequently Asked Questions

11. The Game
Don’t Blame Me
Decrease Leverage, Decrease Return
Fortune Favors the Bold

II. Trend Following Interviews

12. Ed Seykota
13. Martin Lueck
14. Jean-Philippe Bouchaud
15. Ewan Kirk
16. Alex Greyserman
17. Campbell Harvey
18. Lasse Heje Pedersen

III. Trend Following Research

19. A Multicentennial View of Trend Following
The Tale of Trend Following: A Historical Study
Return Characteristics over the Centuries
Risk Characteristics over the Centuries
Portfolio Benefits over the Centuries

20. Two Centuries of Trend Following
Trend Following on Futures since 1960
Extending the Time Series: A Case-by-Case Approach
Trend over Two Centuries

21. Trend Following
Introduction to Different Trend Following Models
Diversification between Different Trend Following Models
Aspect’s Approach to Trend Following
Aspect’s Model Compared to Other Trend Following Models

22. Evaluating Trading Strategies
Testing in Other Fields of Science
Revaluating the Candidate Strategy
Two Views of Multiple Testing
False Discoveries and Missed Discoveries
Haircutting Sharpe Ratios
An Example with Standard and Poor’s Capital IQ
In Sample and Out of Sample
Trading Strategies and Financial Products

23. Black Box Trend Following—Lifting the Veil
The Strategies
Performance Results and Graphs
Sector Performance
Performance of Long versus Short Trades
Stability of Parameters
Are CTAs a Diversifier or a Hedge to the SP500?

24. Risk Management
Risk Management
Optimal Betting
Hunches and Systems
Pyramiding and Martingale
Optimizing—Using Simulation
Optimizing—Using Calculus
Optimizing—Using the Kelly Formula
Some Graphic Relationships Between Luck,
and Optimal Bet Fraction
Nonbalanced Distributions and High Payoffs
Almost-Certain-Death Strategies
The Uncle Point
Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing
Stress Testing
Portfolio Selection
Position Sizing
Psychological Considerations

25. How to GRAB a Bargain Trading Futures…Maybe
How to GRAB a Bargain Trading Futures
Following Trends Is Hard Work
Figuring Out How the Pros Do It
A Computer Model of the Pros
A Terrible Discovery
Solving the Mystery—Why Does the GRAB System Lose?
Often It Is Out of Sync with the Market
Worse Still, It Misses the Best Moves!
Maybe Being Profitable Means Being Uncomfortable?
GRAB Trading System Details
Buys on Break of Support, Sells on Break of Resistance
Testing Reveals Some Behavior I Do Not Expect
Difference between Parameter Values Defines Character of GRAB System
GRAB Trading System Code

26. Why Tactical Macro Investing Still Makes Sense
Managed Futures
Defining Managed Futures and CTAs
Where Institutional Investors Position Managed Futures and CTAs
Skewness and Kurtosis
Basic Statistics
Stocks, Bonds, Plus Hedge Funds or Managed Futures
Hedge Funds Plus Managed Futures
Stocks, Bonds, Hedge Funds, and Managed Futures

27. Carry and Trend in Lots of Places
Carry and Trend: Definitions, Data, and Empirical Study
Carry and Trend in Interest Rate Futures
Trend and Carry across Asset Classes
Carry and Trend across Rate Regimes

28. The Great Hypocrisy

Afterword by Larry Hite
Trend Following Podcast Episodes
About the Author