Trading Food For Thought

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Posted in Economics, Multimedia, Psychology, Trading 101, Trend Following

The Annie Duke Episode: Poker and Trend Following

There are many correlations between trading and poker. Consider this excerpt from my best selling, Trend Following:

In the book Absolute Returns, Alexander Ineichen stresses that trading is a “game.” He sees no rules for the game except the constant of change, but more importantly, he reminds us that it is crucial to avoid becoming the “game.” There are three types of players in the game:

• Those who know they are in the game.
• Those who don’t know they are in the game.
• Those who don’t know they are in the game and have become the game.

If, within a half of an hour of playing poker (or trading for that matter), you don’t know who the patsy is, you’re the patsy, or as Ineichen calls it “the game.” I have introduced those traders who didn’t know they were in the game and therefore became the game in the big events of the Long Term Capital Management hedge fund implosion, the Barings Bank collapse, and the October 2008 market crash. I introduced those traders and investors who did not know they were in the game pursuing Holy Grails that never panned out. And I introduced trend followers who knew they were in a game and brought an edge to the table every time they played. If you know trading is a game and you want to be a part of it, these are stark choices.

Recently I had Annie Duke on my podcast. She is an author, entrepreneur and professional poker player. We discussed several ways in which the psychology of gambling overlaps with that of trading, investment and other aspects of business. The following is brief feedback from that interview:

Mike, loved, loved, loved the Annie Duke episode. My favorite one yet. GREAT STUFF! [Name]

Thanks! More on gaming and betting? Go.

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Posted in Psychology, Statistical Thinking, Trading 101, Trend Following, Uncategorized

Ep. 386: Expanding Your Thinking with Michael Covel on Trend Following Radio

Jason Blum

Jason Blum

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Today on Trend Following Radio Michael Covel takes time out to highlight the fact that trend following isn’t only about trading. From gamblers to pharmaceutical executives to those in the film and music industries, trend following is a strategy rooted in human nature itself.

As an example, Michael examines the success of film producer Jason Blum. In direct opposition to the Hollywood mantra of Spend! Spend! Spend!, Blum has chosen another path. Blum, recognizing that big budgets don’t necessarily mean big profits, developed a filmmaking system based on low budget projects. Blum fully understands that close to half of his films will flop. But he also understands that a handful of box office successes will more than cover those losses. This is the essence of trend following.

Michael goes on to quote from a 2005 article by best-selling author Michael Crichton. Crichton, talking about the then-burgeoning field of futurism, explains that these so-called futurists don’t actually know any more about the future than the average man on the street. These “experts” are guilty of the same flawed thinking that spews forth from the minds of traders who think they know what the market will do tomorrow.

In this episode of Trend Following Radio:

  • Why embracing uncertainty pays big
  • Trend following: it’s human nature
  • Losses: acceptable when you strategize to cover them
  • The sunk cost fallacy
  • Opening your mind to alternative ways of thinking
  • The mistake of blindly accepting the word of “authorities”

“I remind you there is a new kind of special occupation. I refuse to call it a discipline or a field of study. It’s called futurism. The notion here is that there is a way to study trends and know what the future holds. That would indeed be valuable if it were possible. But it isn’t possible. Futurists don’t know any more about the future than you or I. Read their magazines from a couple years ago and you’ll see an endless parade of error.” – Michael Crichton

Mentions & Resources:

Want a FREE Trend Following DVD? Get it here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

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Posted in Film, Podcasts, Psychology, Statistical Thinking

Fundamentals and The Death Cross: Confusion Always

Need a refresher about the fundamental mindset? From Trend Following:

There are two basic theories that are used to trade in the markets. The first theory is fundamental analysis. It is the study of external factors that affect the supply and demand of a particular market. Fundamental analysis uses factors such as weather, government policy, domestic and foreign political and economic events, price-earnings ratios, and balance sheets to make buy and sell decisions. By monitoring “fundamentals” for a particular market, one can supposedly predict a change in market direction before that change has been reflected in the price of the market with the belief that you can then make money from that knowledge. The vast majority of Wall Street uses fundamental analysis alone. They are the academics, brokers, and analysts who spoke highly of the new economy during the dot-com craze. These same Wall Street players brought millions of players into the real estate and credit bubbles of 2008. Millions bought into their rosy fundamental projections and rode bubbles straight up with no clue how to exit when those bubbles finally burst. Consider an exchange between a questioner and then President Bush at a press conference:

Q: “I wanted to ask you [Mr. President], I’m a financial advisor here in Fredericksburg [Virginia], and I wanted to ask you what your thoughts are on the market going forward… and if any of your policies would make any difference?”

The President: “No (laughter), I’m not going to answer your question. If I were an investor, I would be looking at the basic fundamentals of the economy. Early on in my Presidency, somebody asked me about the stock market, and I thought I was a financial genius, and it was a mistake (laughter). The fundamentals of this nation are strong. One of the interesting developments has been the role of exports in overall GDP growth. When you open up markets for goods and services, and we’re treated fairly, we can compete just about with anybody, anywhere. And exports have been an integral part, at least of the 3rd quarter growth. But far be it for me—I apologize—for not being in the position to answer your question. But I don’t think you want your President opining on whether the Dow Jones is going to—(laughter)—be going up or down.”

Now, consider a recent email exchange with a Trend Following Radio listener that expands out in a better direction:

Listener: Honestly, my entire career has changed because of your podcast now that I think about it b/c it was my first exposure to trend following. A couple years ago I listened to your podcast for the first time and didn’t like it, too closed minded. Then I listened again… and again. My mind gradually continued to open and expand.

Covel: Thanks for the nice words.

Listener: Great interview with Campbell Harvey. Definitely have him on again sometime. Hearing about your trip to China was also great as we are in the middle of working on an opportunity over there.


Listener: I agree with your comments on your death cross podcast that Cliff’s tweets seemed a bit odd… But then again, I don’t understand what he is talking about with at least half of his tweets. It indeed is a bit hard for people to understand that trend following is different than predictive technical analysis. I cringe when people ask me “so what are your indicators telling you”. You’ve done a good job at attempting to articulate it. Keep it up. I’m no different than you, I just looked at the data when I came across trend following. Then when I started adding it to a traditional portfolio and found a couple good managers like Chesapeake and Longboard it was a no brainer. I guess for some that’s not enough. That’s fine with me.

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Posted in Holy Grails, Psychology, Trading 101, Trend Following

The Trend Following Attitude

Consider this from Trend Commandments: Who will [it] reach? This book is for those kindred spirits who grasp there is no secret to trading but rather just knowledge you have not yet discovered. It is for anyone who wants to make the most money possible—without going broke or going overboard on risk. It is for investors and traders small and large, young and old, female and male–worldwide. Trend Commandments is also for anyone fascinated by how great trend traders think and act to make a fortune. If you have other reasons for reading this book, that is fine too. My words are not a set of magic rules for becoming a wealthy trend following trader with no work on your end. To achieve the pot of gold, you will need more than that.

Building on my thought, reader feedback in:

Michael, please forward me your Spinosaurus PDF to check out. I am still function at a very basic price trending level and would like to learn how the pro’s do it. Your recent podcasts have motivated me to take more responsibility for my trend following education. I am starting by working my way through your resource page, and will see how far down the rabbit hole that leads me.

Thank you for all your hard work and effort on the podcast and know that it has had a positive effect on my life.

If you ever need security, fire, CCTV services in NJ, NY, PA area–give me a call.

Thank you,


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Posted in Psychology, Trading 101, Uncategorized

Ep. 385: Paul Slovic Interview with Michael Covel on Trend Following Radio

Paul Slovic Interview with Michael Covel on Trend Following Radio

Paul Slovic

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This time on Trend Following Radio, Michael Covel talks with Paul Slovic. Paul is president of Decision Research and a professor of psychology at the University of Oregon, and today he talks with Michael about the science behind risk perception.

To demonstrate how people tend to conflate actual risk with their perceptions of risk, Michael and Paul discuss a topic that’s always been a hot button issue in the public consciousness, nuclear power. In the early days of this industry, people were rightfully concerned with the possible mismanagement of such a potentially dangerous technology – concerns seemingly crystallized by the partial meltdown at Three Mile Island in 1979. Similar concerns continue to be raised today, particularly in light of the Fukushima disaster of 2011. But as Paul explains, neither of these tragedies can completely outweigh the obvious benefits of nuclear power. It’s a case of risk perception to overcome the actual risk posed.

The conversation also focuses on the role of the media in influencing people’s decision-making processes. Why is it, you might ask, that the media spends so much more time pushing negative stories than positive ones? The answer, according to Paul, goes back to biology. It’s a survival mechanism in human beings that we’re affected far more by negative stimuli than positive stimuli. This makes sense when you consider the external dangers we’ve faced in our evolution. So today, we tend to harp on the bad things that happen while ignoring the good.

In this episode of Trend Following Radio:

  • The psychometric paradigm of risk perception
  • Balancing risk vs. reward
  • The concept of affect heuristics
  • How the media sways the public’s risk assessment
  • Fast vs. slow thinking
  • Risk in the context of decision making

“Bad is stronger than good. If something goes wrong in a system it decreases our trust in the management of that system more than when something goes right. Something goes right, it doesn’t really boost our trust and confidence. It’s the negative that outweighs the positive, and the negative is being conveyed to us much more frequently and forcefully through the media than the positive is.” – Paul Slovic

Mentions & Resources:

Want a FREE Trend Following DVD? Get it here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

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Posted in Interviews, Podcasts, Psychology, Risk Management

Trend Following Drawdowns Happen, But They Are Part of Success

Every trader has drawdowns. Consider a chapter from my book, Trend Commandments:

In the early 1990s, Commodities Corporation (a famed trading incubator that taught and bankrolled new traders) invited a group of Japanese traders to its company for in-house training. One up-and-coming trader at Commodities Corporation took his new friends to lunch. He told his guests how important risk management was, and to risk only 1 percent per trade. He was clear that experiencing small losses were part of his process to ultimately finding big winners. The Japanese traders, with puzzled looks on their faces, asked, “You have losses?”

Ouch! Time for everyone regardless of country to learn about small losses, and to love them, even if that means your account will occasionally have drawdowns. What are drawdowns?

Drawdowns are those nonfun time periods where your small losses add up to reduce your account size. They happen. The key is to quickly and successfully recover from them by sticking with your trend trading system and waiting patiently for big trends to reappear, which let you get back to making new money again (and paying for all of those small losses).

How much can you lose? That’s an important question to answer, and it comes down to the risk you take (which will vary by your personal choice). However, trend following is much easier to believe in when you consider the length of professional trend trading track records, especially the really long track records that offer proof of viability. That said, some will spend a lifetime trying to avoid any loss even though its impossible.

Along those lines, recent feedback in:

Hi Michael, Greetings from San Diego! I am a fan of your podcasts and I am new to trend following. The most difficult thing for me to currently digest about trend following is the drawdown side of things. I have some expertise in technical analysis and since my stop is always pretty close to entry depending on my risk appetite and position size, drawdown does not seem to be an issue. But the technical analysis approach needs active managing, hence I am seriously thinking about TF systems. Also, I understand that systems have several other benefits as confirmed by several famous books and personalities including yourself. My question to you is where can I find some of the successful trend following strategies used by people and their corresponding outcomes including trades, drawdowns, profits, etc? And is there a resource you recommend where I can possibly back-test those strategies myself?


Review and email me back. Beyond my free world (and near free) of books and podcast, my Flagship product deals specifically with your issues.

Bottom line, drawdown is always an issue for everyone. It can’t be escaped.

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Posted in Feedback, Psychology, Risk Management, Systems Trading, Trading 101, Uncategorized

40 Great Quotations from Ed Seykota

A big thanks to Steve Burns for the list.

Ed Seykota wisdom:

  • “If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.”
  • “Fundamentalists figure things out and anticipate change. Trend followers join the trend of the moment. Fundamentalists try to solve their feelings. Trend followers join their feelings and observe them evolve and dis-solve.”
  • “The feelings we accept and enjoy rarely interfere with trading.”
  • “Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible”
  • “It can be very expensive to try to convince the markets you are right.”
  • “There are old traders and there are bold traders, but there are very few old, bold traders.”
  • “I would add that I consider myself and how I do things as a kind of system which, by definition, I always follow.”
  • “Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change.”
  • “Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.”
  • “The elements of good trading are: 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance.”
  • “Losing a position is aggravating, whereas losing your nerve is devastating.”
  • “The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.”
  • “Luck plays an enormous role in trading success. Some people were lucky enough to be born smart, while others were even smarter and got born lucky.”
  • “Having a quote machine is like having a slot machine at your desk – you end up feeding it all day long. I get my price data after the close each day.”
  • “A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.”
  • “If you can’t take a small loss, sooner or later you will take the mother of all losses.”
  • “It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with skill to help them.”
  • “Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”
  • “Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.”
  • “Be sensitive to subtle differences between ‘intuition’ and ‘into wishing’.”
  • “The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.”
  • “I usually ignore advice from other traders, especially the ones who believe they are on to a “sure thing”. The old timers, who talk about “maybe there is a chance of so and so,” are often right and early.”
  • “I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.”
  • “I intend to risk below 5 percent on a trade, allowing for poor executions.”
  • “I don’t judge success, I celebrate it. I think success has to do with finding and following one’s calling regardless of financial gain.” (On losing streaks and over-trading) “Acting out this drama could be exciting. However, it also seems terribly expensive. One alternative is to keep bets small and then to systematically keep reducing risk during equity drawdowns. That way you have a gentle financial and emotional touchdown.”
  • “In order of importance to me are: 1) the long term trend, 2) the current chart pattern, and 3) picking a good spot to buy or sell.”
  • “Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.”
  • “Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals”. However, if you catch on early, before others believe, you might have valuable “surprise-a-mentals”.”
  • “If you can’t measure it, you probably can’t manage it… Things you measure tend to improve.”
  • “The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.”
  • “If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right”
  • “To avoid whipsaw losses, stop trading”
  • “Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.”
  • “Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.”
  • “Our work is not so much to treat or to cure feelings, as to accept and celebrate them. This is a critical difference.”
  • “Before I enter a trade, I set stops at a point at which the chart sours.”
  • “Trading requires skill at reading the markets and at managing your own anxieties.”
  • “The positive intention of fear is risk control.”
  • “Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth. This is essential as large fluctuations can engage {emotions} and lead to feeling-justifying drama.”

Nice. See Ed on my podcast too.

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Posted in Psychology, Systems Trading, Trading 101, Trend Following, Uncategorized

Ep. 384: Living by Your Own Rules with Michael Covel on Trend Following Radio

Jerry Seinfeld

Jerry Seinfeld

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On today’s show, Michael Covel talks about decision-making, and how too often people allow the “rules” of others to dictate the actions they take. This, as Michael explains, is indicative of the politically correct culture that’s taken root in all of society.

What are we to think when wildly successful comedians such as Jerry Seinfeld, Louis C.K, and Chris Rock flat-out refuse to play college campuses because of the closed-minded, irrationally sensitive nature of today’s student bodies? How have we arrived at a place where anything less than absolute conformity to preselected attitudes and beliefs means running the risk of being labeled “something”? Racist? Homophobic? Sexist? The list goes on.

What’s worse, as Michael points out, is that this culture of victim-hood has many feeling they’re entitled to certain things simply because they “exist”. These are the people who blindly accept societal rules, rather than analyze and develop proper strategy. Good decision-making, whether in trading or everyday life, means developing a plan and a set of rules and then sticking to them. Because in the end, everyone gets what they want (to paraphrase trader Ed Seykota).

In this episode of Trend Following Radio:

  • Good decision-making through clarity
  • Examining identity politics
  • Operating under your own rules
  • Political correctness: it’s about agendas
  • Good trading means using your system and your mind
  • The importance of staying focused

“We’ve been crippled by social security, Medicare, Medicaid, by welfare, by entitlements. And that is the root of the problem. Entitlements. Let me be clear…You are entitled to nothing.” – Frank Underwood

Mentions & Resources:

Want a FREE Trend Following DVD? Get it here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

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Posted in Podcasts, Psychology, Risk Management

Trading Food For Thought

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Posted in Economics, Multimedia, Psychology, Statistical Thinking, Systems Trading, Trading 101, Uncategorized
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