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Dear Sir/Madam,
I am curious as to what your thoughts are on this topic. I have recently been reading the book Trend Following by Michael Covel. I think it is an interesting book, detailing some of the successful trend traders and why they were so successful (mostly their down-to-earth simplicity first mentality it seems). However, he makes a number of statements that are difficult for me to agree with. The first is that trend following is not predicting the market, please allow me to explain. If I paraphrase him: “Trend following is not predicting the market because the method simply waits for a trend to occur upwards or downwards, and when it is confirmed via some methodology, you get on the trend and ride it out.” The problem I have with this is the fact that it is simply impossible to invest in the stock market without some degree of prediction. In this situation, a trader follows a trend because he has ‘confirmed’ it. Yet this confirming the trend, which simply means that the trader believes that it is indeed a lasting trend, is still nothing but predicting that it is indeed a trend. For example, if a trader gets on a trend when a stock has risen from $80 to $100, if he is in no way predicting the market, there is also no way to say if this trend will continue or not. There are two options, yes or no, and because the trader makes ‘no predictions’ the odds are simply even. However, the trader expects the trend to continue, based on the fact that the trend has started and often continues when it starts in a particular fashion. That is still a prediction. Then why is it that Michael Covel and other trend traders so often make the statement that they don’t predict the markets, they just ‘follow’ the markets, when you only follow someone or something when you have an idea of where it is going?
Furthermore, the statement that the stock market is a zero sum game seems flawed. The overall economy sees an average growth of around 1.9% yearly. That means that if I were to pick 100 random stocks from every sector one year and simply wait it out, I would expect to see a portfolio growth of around 1.9%, following the average economy. However, if the stock market is a zero sum game, I would expect to see a growth of exactly 0%, because on average, I would lose as much as I would win. Is this because inflation is also accounted for in the book? If so, it is not made clear.
I would like to make clear I am in no way trying to undermine the method of trend following, I am simply eager to learn. I look forward to hearing your opinion on the subject.
Sincerely,
[Name]
Futures markets are zero sum. And you don’t trend follow one market in isolation. Need a basket of markets and from that basket every year there is no way, no way at all, to predict the yearly winners.
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