Pauline Skypala of Financial Times and the PSYOP Attack on Trend Following

Pauline Skypala writes in “Secrets of winning systems remain hidden”:

Homespun investment wisdom does not come much cheesier than the Whipsaw Song, available on YouTube. Sung to a bluegrass tune, it imparts the trading philosophy of Ed Seykota, who is regularly described as a legendary trend-following trader. His advice is simple: ride your winners, cut your losses, manage your risk, use stops, stick to the system, file (ie, ignore) the news.

The same list could also be used to summarise the lessons Michael Covel seeks to teach in The Little Book of Trading: Trend Following Strategy for Big Winnings (John Wiley & Sons, 2011). But there is a caveat; it is not as easy as it might sound. In fact, the main insight Mr. Covel provides is that successful trading is hard won, and requires an entrepreneurial mindset, a fascination with numbers and charts, and discipline. A helping hand from a mentor such as Mr Seykota does not go amiss either.

Mr. Covel’s profiles of big name trend followers are more likely to persuade readers to hand over their money to these people than to attempt to emulate them. Retail investors “tend to blow up”, he says, because they lack the discipline to “stick with their system”. The most common mistake is a failure to cut losses–to let emotion interfere.

Clearly, traders need to believe in whatever system they devise so they can trust it sufficiently to leave it alone. Mr. Covel does not give anything away about the workings of the systems of the successful traders he writes about, such as Larry Hite, David Harding and Michael Clarke. He does not “reveal the secrets of trend following insiders” as is promised on the cover blurb.

Such information would doubtless be worth far more than the price of the book, but some of the reviewers on Amazon obviously felt short-changed by the lack of any discussion of trading strategies.

The book merely contains advice such as this: “Certain types of systems do perform better than others, and selecting certain clusters of variables within a system will affect system performance.” Then repetition of the point already made, that once established, a system must be followed religiously. Further, a system must work across all futures markets, over many types of market conditions and over many timeframes.

Such a system could take some time to perfect, but Mr. Covel reassures readers that they can operate it out of their bedroom. There is no need for a big office and an army of PhDs (unless you want to do very short term trading or “sophisticated PhD stuff”, which he does not define).

He advises that market selection is a crucial element in success. Any system would have made money in cotton, but none would have done so in cocoa, for example. “There’s a pervasive mindset that every market should be weighted equally. That’s not true,” he writes in the chapter on David Druz, who apparently learned this from Mr Seykota.

However, in a later chapter on Justin Vandergrift, Mr. Covel says one of Mr Vandergrift’s key realisations was “that risk management centered on trading markets equally, from a risk perspective, was mission critical. You just can’t favour one market over another.”

The first point is about portfolio selection, the second about risk management, so they are not as contradictory as they first appear. Presumably they are both factors that need to be built into a system.

But the rambling and repetitive nature of the book is unhelpful in tying such points together.

Mr. Covel is an evangelist for the trend following style of investment. He decries traditional investment approaches that rely on fundamental analysis, and says buy and hold investing via mutual funds will never make anyone rich. Selling trend-following courses is his business, so this is no surprise.

The apparent ability of trend following commodity trading advisers to make money when all others are losing it, as in 2008, has made investors sit up and take notice of this corner of the investment world. Mr. Covel’s book is timely in that respect.

But the idea that anyone with some skill in maths and computer programming can achieve similar results is fanciful. They may get lucky, but are more likely to get wiped out.

My first thought is courtesy of Seth Godin:

Stand out or fit in. Not all the time, and never at the same time, but it’s always a choice. Those that choose to fit in should expect to avoid criticism (and be ignored). Those that stand out should expect neither.

My second thought? Thanks for paying attention. Now a dialogue can unfurl. You can find a little snippet of a response on today’s podcast too (first few minutes).

Note: I never promise secrets in my books, film or training. Trend following for those not yet familiar with it is all about gaining knowledge you might not have yet. Perhaps, that can be characterized as secrets by some, but it really comes down to hard work–what people pay me for.

You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content.

21 thoughts on “Pauline Skypala of Financial Times and the PSYOP Attack on Trend Following

  1. I guess she’s trying to please her market too – as Editor for the Managed Fund sector, most of her advertising clients will be traditional style funds. Can’t say their performance has been spectacular in the last 10 years. Perhaps shes eaten too much of her own dogfood, hence the grumpy expression on her face.
    So essentially, shes saying that if you emulate the methodologies of people who have been successful for a long time, you can’t match their performance if you’re just a small guy in a back bedroom. I emulate the systems of the great performaers, I am that guy in the back bedroom, and my percentgae performance for May was exactly the same as the mean average performance for the 10 of the largest trend following funds. Her logic is flawed through a lack of knowledge and understanding..

  2. I have read all of your books and tend to agree with Pauline.  I have not attended any of your training courses, but to become a successful Trend Following investors need a Strategy.  I have wondered what you say to people who are looking for a time tested Strategy and are willing to pay for it.  As you know my RIX Strategy has been used very successfully by me for over 40 years.  I do provide it to subscribers and I would love it if you would refer investors to me.  At least you could say that you do provide your readers with a recommendation.  Jim Rohrbach

  3. This is quite an accurate account of the book by Pauline. The book is essentially useless. People who want to trade well, would be much better off reading Van Tharp’s stuff

  4. Makzor, every comment you have posted on my blog has been bitter and angry. Why is that?

  5. Thanks Jim, but we will have to agree to disagree on this one. I know too many who have started from scratch and done very well (many in the book she pans) and or have thanked me for my training.

    In terms of my books there have always been system examples, i.e. Trend Following book appendix, The Complete TurtleTrader chapter 5 and in The Little Book. The part of her review that is perhaps most misguided:

    “But the idea that anyone with some skill in maths and computer
    programming can achieve similar results is fanciful. They may get lucky,
    but are more likely to get wiped out.”

    The main thrust of my books are too open people’s eyes. To show something new. If anyone and everyone thought like Pauline there–there would never be results. The issue is not will everyone do it, the issue is one of opportunity and that is there for everyone. Her option? Clearly, trust the system, fundamentals and perhaps buy/hold indexes for the masses (a few Google searches paint her philosophical picture).

    Of course Jim you do fine trend work, but I am not so sure Pauline would like you and your version of trend following either!

  6. Agreed. There is a flaw in the logic Steve–that perhaps is the most useful aspect of the review.

  7. So, here’s my problem with her book review:
    Why is that idea “trading from a bedroom” so ludicrous to her? Simple concepts in finance are POWERFUL. If she’s a believer in traditional fund managers, then I’d say do indexing with Vanguard instead of being a customer of Fidelity Magellan. Less is more. I mean, “indexing from a bedroom” would annihilate the futile research armies of the vast majority of actively managed mutual funds.As for trend following…just because Graham or Winton or whoever has a research department DOES NOT mean our bedroom trader needs it. Think of Winton’s size…they’ve got order slippage issues (etc.) to be researching that the bedroom trader does not need to think about to the same degree.Indexing is simple and powerful. So is trend following. For the people out there unwilling to dive into the details behind indexing and trend following, it is their choice to remain in the dark. 

  8. Bingo. Bedroom is bad to her–which speaks to having still no foundation as to what trend following even is. She wants rows of PCs and attendant worker bees slaving over data–that is the only place she can imagine success–a typical fundamental view. None of my work would exist if that was true. Every last person I have met, been mentored by, or interviewed in the trend following space was a self-starter.

  9. Covel’s books were the first I came across that were honest enough to admit that it is in our nature to loose money trading. We are just wired to loose money when we trade. Realising this truth is the first step in understanding how to make money trading and realising that only by automating a trading system you stand a chance to earn a living from trading. He never tells people there is this specific holy grail and if you buy the book then you will understsand it and make money trading. This journalist’s review is very shallow and unfortunately misses the entire message of the book. There is no secret formula, and if she thought the book had one, then she is really very silly.

    I guess what we see in the books is in a way a reflection of what is in us. So the books can be very helpful if you are open and honest with yourself, but if you are cynical and negative then the books will only compound these feelings.


  10. I don’t think she understands how simple this business can be.  The best traders are those that learn how to flow with price action.  In your books you give everyone the pieces of the puzzle. It is then up to them to put it together.

  11. You can’t even access most of the stories on FT without being a subscriber, but I have my doubts as to whether or not she’s actively traded any market in her entire life. Skypala pontificates on many subjects she doesn’t understand–extolling the virtues of Vanguard as an investment company, exhibiting disdain for ETF markets, arguing strongly for the progressive tax system and pension reform, and deriding “Ayn Rand worship” and free marketeers in America. In short, she’s a typical left-socialist. Just as well; she can complain all she wants about how trend followers are merely lucky and Mr. Covel is an evangelist (the least likely label I would apply to him). Ours is to do; hers is to complain. =P

  12. Hey Pauline… put your money where your mouth is and take the other side of my trade 🙂

  13. it is just sad to see a main stream newspaper correspondance do not have a open mindset to accept that there is other ways to make money then the traditional buy-n-old, mutul funds, etc.  Why can’t she just try it out first before bashing trend following to bits? One wonder if she or the ft editors are paid by big wall street firms to step on trend following.

  14. Michael, I apologize for that. I did not and do not intend to be bitter or insulting. The reason for my critical comments has been your unbending belief that only trend following is the right thing to do. I come from a fundamental investing background and though it has its limitations, there are people with an excellent track record there, as well as in momentum investing, short-term trading, trend following etc. I have not seen studies showing the % of successful investors in each style, but I guess that it is about the same (very low) in all of them. I have been in the stock market for almost two decades and think it is not the style which matters, but being able to cope with one’s own personal psychology. Once one masters it, it is not that important if he is a trend-follower or a fundamentalist, or chartist, he is likely to make money. 

  15. I agree with Pauline to a point: there are few details of applicable trading systems in most of Michael’s books.  But that in itself proves a point.  Trend Following is simple, but far from easy. 

    For those who don’t know “how to make millions,”  here’s the formula: Buy things going up, Sell things going down, Stay away from things going sideways.”  For definitions of each, go to Investopedia.

    For insights into the psychology of trading, watch The Whipsaw Song by Ed Seykota on You Tube — I suggest watching it a minimum of ten times, and memorizing the lyrics.  To deal with the inevitable drawdowns, you might want to buy a stress ball, copies of Wallstreet (the original, not the sucky sequel — money might not sleep, but I did during that movie), or take up yoga. 

    Good luck!!  Millions are on their way to you!!

  16. She really didn’t understand what trend following is supposed to be. She must use fundamentals or indicators. But the PRICE is the ony thing that matters. “If indicators were good, they should by called by determinants.”

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