A recent interview about trend following sent to me by a Facebook friend:
Interviewer: Today, the topic of trend following is getting more and more attention, and we’re talking about that today with our guest, [name]. [name], you’ve mentioned in the past that trend following is not necessarily as easy as a lot of people seem to think it is. What’s your thought on that?
[Name]: Right. When I hear the term “trend following,” I think of the Michael Covel books, or whatever, about the turtles and about all of this money that was supposedly made, gigantic sums of money, and these are the only successful traders in the world. I have seen people dedicate literally five, six, seven years of their life following the icons of trend trading and they put these people on a pedestal that don’t talk about trading anymore, that don’t even run money anymore, and they talk about trend following as if it were the only way to do things. They struggle and persist for years losing money, attempting to make something off that. These books are full of platitudes like, “Never trade against the trend,” but short on actual strategies for trading with the trend, and so there’s a distinction between trend trading and trend following, I believe.
Interviewer: Say a little bit more about that then.
[Name]: Well, I think a trend trader doesn’t really care about long-term versus short-term. It doesn’t really care about five-minute charts versus ten-minute charts, or one-hour charts, or daily charts, or monthly charts. A trend trader is going to look for a trend on any timeframe chart and look for that recent movement that has occurred to persist and continue, no matter what financial instrument it is and no matter if it’s in a direction that’s counter to maybe the long-term direction. I’ll give you an example. In recent news as the time that we’re doing this recording right now, everybody’s just screaming and yelling about the Euros on, that Greeks are going to fall into the bottomless pit of despair, that we’re all going to die, and Euros is going to blow up, and that Euro has been falling. Well, just recently on a Friday, a non-farm payroll report was released and on the short-term charts, a trend developed on the very short-term one-minute and five-minute charts, a trend follower would obsess about the Euro going down. A trend trader could recognize it on a shorter timeframe chart, a different trend was emerging, and they could make some money trading the Euro up. In the midst of all this panic, where everyone thought they’d be the craziest person in the world, there are many trends and micro trends occurring all across the spectrum in all kinds of financial products everyday the market is open.
Interviewer: It sounds like you’re really a timeframe agnostic.
[Name]: I’m a complete timeframe agnostic. In fact, I’m probably going to be burned to the stake by the icons of trend following after this interview. Exactly, I don’t care. I don’t care if it’s the Euro or if it’s gold, if it’s copper, if its feeder cattle, I don’t care. There’s always a trend that you could say you’re following on a big picture, but inside those shorter timeframe charts, there’s a rich universe of activity going in both directions all the time.
Interviewer: Any tips for people who are watching this to help them learn to identify some of these trends?
[Name]: Well, I would say if you want to be a trend trader instead of a trend follower who buys a bunch of books and talks about it like it’s the Bible, here’s something that you can do. Look on those shorter term charts, especially in the world of futures in Forex, for example. Wait for an economic report, like an interest rate decision, an inflation report, or a non-farm payroll report to be released. Watch as a micro trend emerges, following the release of that report. Don’t trade before the report, but watch on these days when these reports are released and watch as a micro trend emerges, higher highs and higher lows, or lower highs and lower lows, on the one-minute or the five-minute charts that most people would overlook. You can see wonderful four-hour long trends occur on these shorter timeframe charts that are easy to identify, and as long as you’re willing to trade in either direction, it’s relatively easy to trade.
Interviewer: Thank you so much, [name].
[Name]: It’s great to be here.
Now for some real data to review in retort: “A Century of Evidence on Trend-Following Investing” (PDF). Further, make the concrete comparison between the interview above and my books.
Bottom line: If you hear the terms micro trend, inflation report, non-farm payroll, economic report, one-minute chart–you are not hearing anything remotely related to trend following trading. If those terms, those standard issue market phrases, are in your vocabulary you have a very good chance to go broke in the future. With your eyes wide open draw smart conclusions. Your account depends on it.