Blind and Calculated Risk: Where Do You Stand?

An excerpt from Trend Commandments:

There are two kinds of risk: blind and calculated. The first one, blind risk, is always suspect. Blind risk is the calling card of laziness: the irrational hope, something for nothing, the cold twist of fate, winning the lottery, etc. Blind risk is the pointless gamble, the emotional decision, or the sucker play. The man who embraces blind risk never wins in the long run. However, calculated risk can build fortunes, nations, and empires. Calculated risk and bold vision go hand in hand. To see the possibilities, work things out logically, and to move forward in strength and confidence is how you win. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time. Trend followers thrive on taking calculated risks. Like the original Karate Kid movie: Wax on, wax off. Risk on, risk off.

Now consider this feedback from a listener:

Listener: I want to take this opportunity to thank you for making an enormous impact on my life. I became hooked on investing when I was around 15 and became convinced that I would study enough to be like one of the greats like Buffet or Dalio. I learned the hard way that this is simply a dream. I would make bets of 1,000 dollars on speculative biotech’s I had read about or the latest recommendation of Jim Cramer’s. Throughout high school I continued to lose 1,000 after 1,000 until I finally ran out of money completely and had to start college. I was very discouraged but eventually stumbled across your podcast on iTunes and became immediately hooked. I began to pour into your books, blogs, and podcasts and learn everything I could on systematic trend following strategies. I still remember that first aha! moment I had in when studying trend following. That moment when I have realized that I have actually finally discovered the method of trading for me. I have found myself unable to sleep and unable to concentrate on college because of the fact that I am hooked on the teachings of the greats that you interview. I am currently trying to develop my own system of trend following but I am stuck on the indicators. I am not sure how many indicators within a given system is too many and how many is too little. I can adjust the profit level during backtests with various different indicators but I am wondering if there is an ideal threshold depending on the account size? I am also wondering what steps I should be taking next. I want to start my own trend following firm or fund I am just unsure of where to start. I have many more questions for you Michael Covel. You have put the trend following bug in me and now I am unable to sleep or focus on anything else but learning. I am a 20 year old finance major in Colorado who has discovered how valuable your work is compared to the drivel I sit through everyday in class. I have no money to offer you because I am still in school but I am hoping that if I stay persistent enough that I will eventually be able to get in contact with you.

Covel: Steps to follow: Go.

Listener: Thank you so much I really appreciate it. I have another quick question for you. Are these what a systems basic rules would look like? Is 2 indicators not enough? I am wondering if keeping the rules simple or to a minimum is more effective long term? Or does more indicators equal better data and results? I am just unsure if I am on the right track with this type of strategy or if I need to start over with my research. Thank you so much for the help it has been impossible to find anyone in person to answer these questions for me. The [name] State professors really pissed me off when they referred to trend following as “a momentum black box strategy.” These PHD idiots have never even heard of systematic trading.

Covel: Thanks for your interest. As you can see on the link sent I give away a lot. With podcast and my books, it is a ton of material, but personal consulting I keep inside my Flagship product. That’s my process.

Listener: I love it Michael! Can’t do everything for free.

Covel: One of the reasons my consulting firm developed was the same issue you have now — learning. But not just learning by listening to voices all over online, but from the best in person. I spent a ton to learn. It never bothered me, it is what it was. You have to go where the information is that you need, as fast as possible.