…this is exactly how chess players improve most effectively…by studying the games of grandmasters, trying to reproduce them move by move, and, when they choose a move that is different from what the grandmaster chose, studying the position again to see what they missed. [Ben] Franklin [known chess fan) could not apply the same technique to chess because he had no easy access to the games of masters. Almost all of them were in Europe, and at the time there were no books with their collected games for him to study. If he had had some way to study the masters’ games, he might well have become one of the best chess players of his generation (Source: Peak).
Great thought. Exactly why I put pro trend following performance in my books. His wisdom is also the background foundation of turtle trend following success.
Barry Ritholtz pushed along the notion that Ted Williams was the first quant.
But what is so great about being a quant?
The edge.
Having an edge is what a game of numbers is all about.
Consider the controversy with Stephen Curry. The older retired players don’t see the quant aspect of his play:
Stephen Curry is not, in fact, unguardable. The plays he makes can be stopped or contained if a defense dedicates itself fully to those particular ends, much in the same way that any action on a basketball court can be. The distinction lies in the cost. Curry operates in a fashion that makes the necessary means of defending him counterproductive to the very enterprise—a spatial frustration that makes the reigning MVP, for all practical purposes, impossible.
This was apparently lost on NBA great Oscar Robertson, whose context-deaf response seemed to ignore the fact that Curry poses a greater threat farther from the hoop than any player in basketball history. So fearless is Curry and so trusting is Warriors coach Steve Kerr that shots well beyond the arc have become standard. Curry will pull up giddily from 30+ feet if left to his own devices. NBA defenders are learning how lonely that depth can be, and how hopeless the effort to deny Curry has become.
Concluding:
The openings he finds aren’t due to some lack of ingenuity in scheme or lack of pride on the part of the defenders. Curry merely has a way of creating quandaries without the slightest hope of a satisfying conclusion. There comes a point at which players and coaches would rather lose to a 28-foot pull-up than a compromised interior. It’s then that the best player in basketball has his opponents right where he wants them—conceding, hopeless, and in their own way, defeated.
He has found a new edge…and he is exploiting it. He is riding that trend.
What is the worst action opponents can take? To live in denial of the Curry trend!
A great example of denial can be seen when Nokia CEO ended his speech saying “we didn’t do anything wrong, but somehow, we lost.” Consider:
During the press conference to announce NOKIA being acquired by Microsoft, Nokia CEO ended his speech saying this “we didn’t do anything wrong, but somehow, we lost”. Upon saying that, all his management team, himself included, teared sadly. Nokia has been a respectable company. They didn’t do anything wrong in their business, however, the world changed too fast. Their opponents were too powerful. They missed out on learning, they missed out on changing, and thus they lost the opportunity at hand to make it big. Not only did they miss the opportunity to earn big money, they lost their chance of survival. The message of this story is, if you don’t change, you shall be removed from the competition. It’s not wrong if you don’t want to learn new things. However, if your thoughts and mindset cannot catch up with time, you will be eliminated.
Conclusion: The advantage you have yesterday, will be replaced by the trends of tomorrow. You don’t have to do anything wrong, as long as your competitors catch the wave and do it RIGHT, you can lose out and fail. To change and improve yourself is giving yourself a second chance. To be forced by others to change, is like being discarded. Those who refuse to learn & improve, will definitely one day become redundant & not relevant to the industry. They will learn the lesson in a hard & expensive way.
The dots connect and connect and connect. And plenty will never see that connection, but perhaps they just don’t want to see.
Consider an excerpt from the opening chapter in my book “Trend Commandments.”
I have replaced the word “book” with “trend following”:
Who will [Trend Following] reach? [Trend Following] is for those kindred spirits who grasp there is no secret to trading but rather just knowledge you have not yet discovered. It is for anyone who wants to make the most money possible—without going broke or going overboard on risk.
It is for investors and traders small and large, young and old, female and male—worldwide. [Trend following] is also for anyone fascinated by how great trend traders think and act to make a fortune. If you have other reasons for [learning], that is fine too.
My words are not a set of magic rules for becoming a wealthy trend following trader with no work on your end. To achieve the pot of gold, you will need more than that. However, to explain all the details you will need, you must know what you are up against.
The well-constructed fortress of government, media, and Wall Street, all designed to bleed you dry, is “The Wall” (think Roger Waters). None of those players want you to comprehend or act on the contents of this book. If you do get it, those groups lose power and money. They do not want to lose anything. Their grip on you is stranglehold tight.
Getting rich is a fight; make no mistake about it.
Now feedback:
Michael,
First off, let me say I absolutely love your podcast. I started listening to your podcast in January as part of my New Years resolution of continuing to learn, and it is one of my absolute favorites.
I’m looking to get started in trading and have been listening to your podcasts, reading some of Steve Burns books and listening to some other podcasts as well. At the end of episode 423 you offered a beginners guide to people who email you, as well as access to your video.
I would greatly appreciate it if you would pass those along to me. Also, if you feel like recommending any other resources for a new trader, that would be awesome.
Once again, thanks for your podcast. I look forward to new ones several times a week.
I would like to start of by thanking you for great shows. I began listening only a few weeks ago, and I dare say it has changed much in my life. I have ordered one of your books and look forward to reading it, also I am mapping out possibilities for me to depart from the herd and attempt a life I’d prefer in the long run; Investing and trend following obviously included.
I heard you recently watched the Sopranos, so did I. Really enjoyed this link I found, maybe you will too.
Many thanks Michael, I look very much forward to continued contact through your awesome podcast!
[Name]
Thanks!
Let me add more…
The best way to understand trend following is not by only reading rules that might make up a particular trend trading strategy, but also by meeting the men and women who practice it. Unfortunately, investors today are reluctant to concede that they might do better when it comes to their finances with mentoring or guidance. Although they will sign up for a cooking course, they won’t take advantage of wisdom from those who have made fortunes. They prefer “reinventing the wheel” to modeling their behavior after proven excellence. However, because I consider role modeling to be critical to learning correct trading, this chapter profiles excellent trend followers.
As an observer of trend following, I’ve come to realize that if you take historical and current trend following performance data seriously, you must make a choice. You can accept the data as fact, make an honest assessment of yourself and your approach to making money, and make a commitment to change. Or, you can pretend the performance data of great trend traders doesn’t exist and keep on buying and holding. If you think you’re likely to make the latter choice, reconsider whether trend following is for you.
Trend followers are generalists when it comes to their trading strategy. Tom Friedman, a great author in the field of international relations, explained this important distinction:
“The great strategists of the past kept forests as well as trees in views. They were generalists, and they operated from an ecological perspective. They understood the world is a web, in which adjustments made here are bound to have effects over there—that everything is interconnected. Where might one find generalists today? The dominant trend within universities and the think tanks is toward ever narrower specialization: a higher premium is placed on functioning deeply within a single field than broadly across several. And yet, without some awareness of the whole— without some sense of how means converge to accomplish or to frustrate ends—there can be no strategy. And without strategy, there is only drift.”
The the great ones see the whole. They see the connections. They also know how to separate their emotions from their financial decision making. One “market wizard,” Charles Faulkner, explained how crucial it is to know who you are:
“Being able to trade your system instead of your psychology means separating yourself from your trading. This can begin with your language. ‘I’m in the trading business’ and ‘I work as a trader’ are very different from ‘I’m a trader’ or ‘I own a few stocks and bonds’ (from a major East Coast speculator). The market wizards I’ve met seem to live by William Blake’s phrase, ‘I must make my own system or be enslaved by another’s.’ They have made their own systems—in their trading and in their lives and in their language. They don’t allow others to define them or their terms. And they are sometimes considered abrupt, difficult, iconoclastic, or full of themselves as a result. And they know the greater truth—they are themselves and they know what works for them.”
Consider more feedback from a listener that stumbled on trend following trading:
Hi Michael,
For some reasons, I didn’t feel its right to send you this email with my actual identity, but wanted to share the experience and couldn’t resist as it has been on my mind for a while. Also, I wanted to Thank you for everything you are doing and have done to allow more people to participate (if they choose to) in the wonderful world of TF.
I am in my Mid-30s now, earlier in my early 20s, I was working for an investment bank, known to be among the top in markets domain on their main (most productive) trading floor. Back then, I wasn’t into trading either professionally or personally (now I am) but I was working professionally within the markets division for derivatives of that bank.
Well, what happened one fine day was, I walk into one of the main meeting rooms late at night to take a break and while on my cell phone trying to call a cab and I see a diary lying around. We had been strictly instructed to clear our desks before leaving office in the evening and lock away anything confidential or valuable as we had been through instances of confidential documents leaking out and stealing by cleaning staff, both in prior weeks before that day.
I opened it to see to whom it belonged to and there was only a first name mentioned on the first page, a very common first name that too, so I had to scroll through it to try to know whom it belongs to so that I can return it.
Well, to cut it a bit short, there was a page which made it clear to me to whom it belonged to and that page had 3 years of revenue split for whole of prop trading group, the total revenue of which was in Billions. The top 3 for each of the 3 years was something called TF. And within that TF, it was split as TF1, TF2 and TF3. I didn’t know much about TF but that info was enough for me to determine it belonged to the head of prop trading. So I returned it next day to him, he thanked me, asked me in which team did I specifically worked and that was it. That TF word stayed with me but I never knew what it meant as I wasn’t in Trading, nor did it make any links with the published financial reports of the bank, as the real source of revenue is scrambled, camouflaged and randomly inserted somewhere to retain competitive advantage in market.
Having worked in that ibank for many years, NEVER EVEN ONCE did I hear that the bank is making a lot of money in TF, at the most we used to hear that prop made a lot of money.
That thought just stayed and stayed and periodically popped up as the numbers were huge, with a follow on thought that I must make it to some prop trading group of one of the big banks (perhaps a better thought and intention would’ve been that I need to develop/implement/run my own TF asap).
Well your book (and books rather as Ive read all of them – both old and new editions in the last 12 months or so), helped me take the next step of my journey and I realized what the underlying engine is and how to use it and what my actual/true goal should have been.
What you are doing and have done means a lot to me and has changed the course of my life and the whole approach towards it. It came a few years late but nonetheless its better than never and the good point is that it came to a wiser, experienced version of me perhaps. The least I wanted to do is share the whole stream of thoughts with you and say a big Thank You.
Thanks for everything, please keep going.
I’ve exchanged with you on my actual id as well and am sure, I’ll meet you one day, a day that I keenly look forward to.
Cheers,
Anonymous
Great feedback!
Having a system you can count on is critical to trend following success. Answer the following five questions, and you have a trend following trading system:
1. What market do you buy or sell at any time?
2. How much of a market do you buy or sell at any time?
3. When do you buy or sell a market?
4. When do you get out of a losing position?
5. When do you get out of a winning position?
Said another way:
1. What is the state of the market?
2. What is the volatility of the market?
3. What is the equity being traded?
4. What is the system or the trading orientation?
5. What is the risk aversion of the trader or client?3
You want to be black or white with this. You do not want gray. If you can accept that mentality, you have got it.
Some might say, “Oh, I have a system.” What he typically means is that he has a system, and it advises him what to do. If he likes the advice, he’ll take it, and if he doesn’t like the advice, he won’t take it. That is not science. You cannot test or simulate how you were feeling when you got out of bed 15 years ago when you’re looking at historical simulations. If you’re going to trade using a system, you must slavishly use the system and avoid discretionary overrides. You do whatever the hell the system says no matter how smart or dumb you might think it is at that moment.
Trend following systems can vary, but principle elements remain the same. A reversal system, a very common system, has two modes: You are either long or short. It is always in the market. It closes one position by opening a new one in the opposite direction.
Another type of system has three-phases adding a third mode: neutral, where you are not in the market. If you are long, and you get an exit signal, you don’t necessarily go short automatically. You can be out of the market. Here are concrete trend following system examples to start you on the path:
You can either be long or short at any time. You enter a long position (and exit a short position) if the current price exceeds the highest price in the previous 100 days. You enter a short position (and exit a long position) if the current price drops below the lowest price in the previous 100 days. You are positioned either long or short in each market at all times depending on the direction of the prevailing trend.
You allocate risk, and size your position based on each market’s historical volatility. Each market receives an equal allocation of the total portfolio risk. Position sizes are normalized based on their volatility. The measure of volatility that you use is called the Average True Range. The size of your position you take in any given market is dependent only upon the individual market’s volatility and the total account value, that is, it is independent of any other market’s volatility or position in your portfolio.
You buy when a market makes a new four-week high or sell when it makes a new four-week low. If you are long, you go short if it makes a new four-week low. If you are short, you go long if it makes a new four-week high.
The absolute key is, and this will never register with skeptics and critics, your discipline to stick with your system. That will always far outweigh whether you have the perfect set of entry and exit rules.
One more piece of listener feedback:
Mr. Covel,
I recently discovered your material and wanted to take a minute to thank you very much for your work. I have been stumbling around in the markets for the past 15 years with no real game plan, consistency nor discipline. Your material has helped guide me in the direction that I have been “trying” to go in for years. I have purchased all of your books, your movie and listen regularly to all of your podcasts. I actually make your podcasts a part of each of my trading days as my educational component.
Thanks to your guidance I have been able to develop a very simple trend trading system that I use in the currency markets. Reading all the past stories of the successful trend followers and their words stick with me on days in which the markets are going against my positions and it allows me to clear out those negative thoughts and get back on track.
I am especially a fan of Jerry Parker, being from Richmond, Virginia myself it is very interesting that a TurtleTrader was from this area. I would love to run into him one day to hear his story first hand.
Thank you again for all of your information, I’ll be a fan for years to come and will pass your name along to all of my associates.
Maybe one day in the future you’ll be interviewing me once I build on my trend following track record.
Respectfully submitted,
[Name]
PS: A good friend of mine is a pure “fundamental trader” and he is always knocking my technical, trend following approach. Just yesterday he told me he loaded up on Yahoo based on a “gut feeling.” I said, Jim, why are you buying? Yahoo has been in a down trend for months. Today YHOO dropped 8% I think. He is licking his wounds, maybe one day he’ll wise up and simply GO WITH THE TREND!
Thanks!
A final quote from Ed Seykota:
“Trend Traders don’t try to predict the non-existing future. They post-dict events and ride trends.”
Please enjoy my monologue Disruptive Innovator with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
Math in football
Thinking like a contrarian
Risk management
Fundamentals
“I am the type of guy that believes humans make mistakes when they make decisions off of emotion.” – Kevin Kelley
“Doing something different just to be different, that can’t sustain itself. It has to contribute to winning or it falls by the wayside.” – Kevin Kelley
My guest today is Michael Ellsberg, an American author, blogger and public speaker. Ellsberg is credited for inventing “eye-gazing parties,” a craze in 2010 where participants stare deeply into each other’s eyes and follow up if they feel they made a connection. He is also a book editor and has spoken at Google and Peter Thiel’s Fellow Retreat.
The topics are his books The Last Safe Investment: Spending Now to Increase Your True Wealth Forever and The Education of Millionaires: Everything You Won’t Learn in College About How to Be Successful.
In this episode of Trend Following Radio we discuss:
Super skill vs. Market skill
Systemic spending
Cultivating meaningful relationships
Thinking three dimensional
Creating happiness in your life
“The things you actually want to experience in your life, you can’t just buy them when you’re 65.” – Michael Ellsberg
My guest today is Vineer Bhansali, founder and CIO of Long Tail Alpha. Vineer’s 29-year investment career started at Citibank, where he founded and managed the Exotic and Hybrid Options Trading Desk. He later joined Salomon Brothers in its Fixed Income Arbitrage Group, followed by the CSFB Proprietary Trading Group. Dr. Bhansali was at PIMCO for 16 years, serving the last eight years as MD and Head of the Quantitative Portfolios Team, which he founded in 2008.
The topic is his journal A Behavioral Perspective on Tail Risk Hedging.
In this episode of Trend Following Radio we discuss:
Is trend following mean reverting?
Tail risks
Tail hedges
Human behavior and biases
Importance of a dynamic portfolio
“[Trading] really very much depends on people’s behavior and your extraction of what is driving that behavior.” – Vineer Bhansali
My guest today is Philip Tetloc, a Canadian American political science writer currently at The Wharton School of the University of Pennsylvania. He is right at the intersection of psychology, political science and organizational behavior. Phil is also a co-principle investigator of The Good Judgment Project, a study on the art and science of prediction and forecasting.
The topic is his book Superforecasting: The Art and Science of Prediction.
In this episode of Trend Following Radio we discuss:
What are superforecasters?
Probabilistic thinking
Looking at data
“It is interesting that their seems to be more software engineers that are superforecasters than political scientists.” – Phil Tetlock
