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Trend Following FAQs #2

Michael Covel
Michael Covel

My main frequently asked questions page is here, but this is another page of questions in from readers:

Q: I read your book, “Trend Following” and I liked it very much. I started trend following before I even knew it was a thing. In the beginning of my trading experience I made a good amount of money trend following stocks but it quickly fell apart and led to huge losses. I don’t make very much money but in a few months I lost like 2k. At which point I came to the conclusion that it doesn’t work for stocks. I gave up and just use the old blue chip buy and hold. I suppose if it ever dramatically dropped I would sell but I think that’s not really trend following, it’s blue chip buy and hold and stocks seems more like a savings account than anything. It was a crushing blow that it didn’t work and basically killed my dreams. I found out about Forex through the book and started trading it a couple of weeks ago. I like it better than stocks and thought trend following might work there since it would appear that there are strong trends. However, I lose even more money in Forex. Not to be a downer but I’m not convinced that trend following works at all. But who knows maybe there is some market somewhere that trend following would for but I haven’t seen it. If I set my stops small I don’t lose much per trade but I rarely gain money and the small losses add up. If I set my stops large to get around volatility I can make money but it usually turns against me and a small gain is a huge loss in a heartbeat. Who knows maybe there is some voodoo magic involved? Have a nice day and your book was very entertaining.
A: Thanks for the feedback. Some resources for skeptics:


Q: I am a follower of yours for several years now since back in the day I read your book Trend Following. In one of your previous podcasts you said something in those lines: that a true trend following system does not require charts or looking at charts. Every aspect of the system can be systematized. This struck me. I totally believe it right. Unfortunately, most systems these days requires looking at charts and charts patterns. So I wonder if you know some trend following systems that do not require charts? And which are they? I know that the [name] system can qualify as one. But are there others?
A: My Flagship product does not require charts. If a trend following system “requires” charts its not trend following.

Q: Thank you for sending me the 2 DVDs which I received recently. I find the interviews and information very motivating. I am interested to purchase the system, but would firstly like to have a better understanding of what will be included in the package. From a review of the Flagship vs Standard package there are various manuals and DVDs. My questions:

1. Is there a software program included in the package which can be used to assist in making trading decision?
2. If no software is included, will the manual teach me to develop the software program?
3. Since there are hundreds of pages in various manuals, are there standard Trend Trading templates for use?
4. From your students feedback, what is average time needed to develop a fully functional Trend Trading System.

Thank you for your time and appreciate receiving your response.
A: Answers:

1. All decisions are derived from rules we provide. Those rules are easily understood. A computer and or third party software helps to automate, but it’s only following the decision-making of the rules. One could of course execute those rules with pencil/paper, but automation makes life easier. We help clients with third party software options/advice, but we provide the most important part of good trend following in Flagship–the logic.
2. You will not develop software. There are many third party apps, many, that you can put rules we teach into.
3. There are base/standard rules. The pages included are mostly examples, reinforcements, lessons, psych issues, etc. Not 100s of pages of rules.
4. You will have a full trend following system once you become a client. Learning can take place in as few as 6 weeks (rough guide).

Q: I have been trading stocks for 10 years now and after reading tons of books, among Darvas and other, I came across you and your trend following. As a small investor, I have been looking at ETF’s that I can invest in. I have found the Hull tactical US ETF, but are there any more? I wanted to buy some of Dunn but his and several more once are just for institutions or for big money traders, and I’m not there yet. I have a Masters Degree in Civil Engineering and Bachelors in Economics and been working within the consulting business and energy [sectors]. But now I know that this (trend following) is what I want, so I wonder if you have any tips or contacts? Or maybe talk a bit about it in your pod!
A: I don’t directly promote trading managers, or follow all of their products, but there are many “names” across my books and podcast. Also, for those clients that want support, education and a system to trade, my Flagship offering is very popular.

Q: I would like to inquire about the trend following training program especially on the premium flagship system + training. I am only interested in currencies and I have been trading the spot forex market for about a year now, but I have never traded fx futures or fx options so far. My question is do you have training on trend following system that is only for forex trading? I have read through your web page on premium flagship training and you mentioned that currencies (fx) is one the markets covered in this training but then you also mentioned that the instruments/system used is for ETFs, leaps options and futures, then what about forex trading? I am really interested to join the trend following training program if you can have it specialize for Forex trading. By the way I have also read through the amazing Turtle Traders stories, but may I ask [if] any one of the successful turtle traders are major Forex trader[s]? I hope you can enlighten me on this issue and I look forward to your favorable reply.
A: You can use futures, leaps or ETFs to trade currencies (FX). Currency markets can be traded across those 3 markets. I don’t recommend the heavily hyped FX market alone (that is pushed by brokers online). Trade on regulated exchanges. Better. Yes, you can be a trend following trader on currencies, but why limit yourself to currencies alone? Diversification is the free lunch and you need to take it. Note: All trend followers trade currencies, FX, Forex or whatever you want to call it.

Trend Following on Stocks

One of the great myths regarding trend following is that it does not work with stocks. That is wrong thinking. Trends in stocks are no different than trends in currencies, commodities, or futures. Chesapeake Capital, Jerry Parker’s trend following firm, for example, has adapted its system to stock trading. Parker says his system works well with stocks, particularly stocks in outlier moves that are in single industries. He adds:

“Our expertise [is] in systematic trend following or model development. So maybe we trend follow with Chinese porcelain. Maybe we trend follow with gold and silver, or stock futures, or whatever the client needs. We’re trading these great systems, and testing, and making sure what we do has worked in the past. And being disciplined, and unemotional, and applying our methods to the futures markets, but limiting our trading to this one group of markets. We need to look at the investment world globally and communicate our expertise of systematic trading.”

Bruce Terry, a disciple of Richard Donchian, dismisses out of hand that trend following is not for stocks:

“Originally in the 1950s, technical models came out of studying stocks. Commodity Trading Advisors (CTA) applied these to futures. In the late 1970s and early 1980s, stocks were quiet and futures markets took off. That is how the CTA market started. It has come full circle. People are beginning to apply these models to stocks once again.”

I am reminded of the opening line from a 1979 article from “Managed Account Reports” that I found in research:

“Trading stocks and commodity futures by means of trend following techniques is an art with a long history.”

Don’t forget it.

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