Does the Evidence Support This Anti-Trend Following View?

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.

20 thoughts on “Does the Evidence Support This Anti-Trend Following View?

  1. Really?What’s wrong with what the interviewee said? Trends DO occur on any number of different time frames. In fact, if you remove the time axis from a daily or monthly chart, you CANNOT tell the timeframe…it may as well have been a 5-minute or yearly chart! The comment about non-farms payroll, economic reports etc simply points to what may CAUSE trends, but we all know that what causes trends is NOT important, only that the trend is occurring. What’s wrong with that??

  2. Like I commented on that guy’s youtube post, he knows nuts about trend trading/following. Please do continue with NFP economic indicators etc. trading while the poor trend traders continue into the next decade(s) trend trading with idols in our sights.

  3. 1. I have provided a counter in the form of 4 books and a recent PDF showing trend following performance back to 1903. 5-minute charts and non-farm payroll talk is not that.



    Does the comparable research and evidence exist to support 5 minute bars?

    2. In terms of the quaint idea that 1 or 5-minute bars makes sense for the average Joe to go out and start trading…why not go to 15 second bars? Or 5 second bars? The speed of light? For some this speed thing sounds perfectly plausible until you take it to its natural conclusion–trading “light”. Then most people wake up and see it for the ruse that it is.

    3. If you want to attempt to trade 15-second bars–or whatever–go for it. It’s not trend following though and the notion that trends can be traded the same across all time frames doesn’t jive with any known evidence.

  4. Michael much of this is a question of definition of trend and for your marketing purposes you make very specific case for defining trend following as you see it. As the mystery trader said trends can be seen to exist on multiple time frames. There are many ways to trade that are successful and normally to do so in the direction of a higher time frame makes sense. It is not nonsensical to say that one can trade 5 minute trends etc. After all he distinguishes that traders trade and in my opinion those that believe in capturing trends find trades that are meaningful to them and fit their system parameters / personalities. While the mystery trader may not fit into your neat definition of a trend trader if one utilised a fundamental event as a stimulus to surf the wave in the direction of a trend on whatever time frame has he not followed a trend? I think he has. I know traders who are successful on shorter term time frames that utilise the 15 minute or 30 minute chart for their higher time frame guidance and capture moves on the 3-5 minute charts. I know traders that use monthly bars and there is of course everything in between. There are many ways to make money in the market and many time frames. It doesn’t take anything away from the excellent information on trend following that you market but the if it’s not trend following as defined by Covel argument isn’t completely fair. Lastly the speed of light sounds awfully like Ed lol. Perhaps you should add quotations?

  5. When I started my journey I looked for evidence. Proof. Easily found in the trend following world. The other worlds? Well, I am not here on this shiny blue planet to spend my waking days counteracting a fantasy of 1 minute bar trading (or light trading as Seykota might say). Let everyone believe what they want. Some people like evidence, some don’t.

  6. Fair enough. Just for the record if I were to ever employ anyone your books would be required reading. Just as a trader there are many ways to skin a cat. Trading with the trend is certainly my favoured but even within that there are many many approaches that can work. I simply wanted to make the point that the trader you quote was only wrong based on your definition of trend trading which may not be the definition held or utilised by all. You can guess by my blog name etc that I am more with you than against you though. Take care, Michael

  7. I don’t view any of this as personal … just like to see evidence more than I like to see opinions.

  8. Trading is not academia: in academia the objective is to PUBLISH evidence so that it can be reviewed by peers; in trading the point is to HIDE evidence of successful strategies for fear that these strategies might be copied by peers. Bearing this in mind, to say that you have seen no evidence of trend-following working on shorter time-frames, and to then use this as the basis upon which to conclude that shorter-term trend following does not work is not particularly sound logic. Absence of evidence IS NOT evidence of absence. Wouldn’t you agree Mike??

  9. So there is not one operation with an observable track record that performs in your world of 1 or 5 minute bar trend trading? To see a track record would be so revealing that the future performance from such a strategy would be hindered? I see.

  10. You’re missing the point Mike, which is: even though you HAVE seen track records with significant risk-adjusted contributions from shorter-term trend trading strategies (I know that as a fact, since you HAVE seen and spoken about my firm’s track record), you had no idea about exactly how all the components of the strategy acted together to produce the final observable result. Remember, the key isn’t necessarily long-term trend trading per se, it’s risk management and position sizing, both of which, though easier to implement on longer term trends, are invariant to time period nonetheless, as long as trading costs don’t exceed profits (ie as long as there is positive expectancy). Asymmetric risk really is time-frame invariant.

  11. OK Mike, what else can I say? These aren’t my opinions, they are fact…and facts not gleaned from second-hand accounts but from my own design and construction of asymmetric risk systems for my and other firms over the years. I’m sorry that I can’t convince you about what I’m saying, but it IS true…our realized equity curves are real and a significant contribution to the compounding of the curves does come from shorter term trends…what more can I say buddy?

  12. Who are you trying to convince and for what purpose? You have put no evidence out, but want to *win*–ok you can win…

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