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“The Market is Always Right.”

Posted on by Michael Covel

Jim Rohrbach writes:

I was listening to the Gary Kaltbaum show last night, and my friend Brian Balsanek was filling in for Gary. Brian said something that was very profound and simple. He said, “The stock market is always right.” I love that. Yes the market is always right. Often we hear people saying that the market is going to go up or go down. They place their investment decisions with what they think the market is going to do. Then when the market doesn’t do what they think it should do, they try to tell us that the market is wrong. They don’t admit that they are wrong. The market does what it wants to do and it is always right. We may not agree with what the market is doing at any point in time, but it is futile to say the market is wrong or to invest opposite the market. If the trend of the market is up, that is the correct trend and we need to go with it. If the trend is turns down, we should get out and not try to rationalize that the market should not be going down. Since the market is going down, and since the market is always right, we should get out.

Nice Jim.

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Ep. 90: Richard Weissman with Michael Covel on Trend Following Radio

Posted on by Michael Covel
Richard Weissman
Richard Weissman

My guest today is Richard Weissman, a professional trader with over 25 years of experience and an author. Weissman considers himself a “swing trader”. He is one of the world’s foremost authorities and thought leaders in the fields of derivatives, risk management and technical analysis.

The topic is his book Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House.

In this episode of Trend Following Radio we discuss:

  • Weissman’s path from how he started trading with his father in 1987 to how he made his way to where he is today
  • Background to Weissman naming his book
  • The influence of Jack Schwager’s work
  • Risk management
  • Positive expectancy
  • How Weissman defines trends and signs of strength
  • The idea of “don’t anticipate, just participate”
  • Positive expectancy and the probability skew
  • The connection between table limits and risk management
  • How there are no truly “safe investments”
  • Some tools that Weissman has used to influence his own trading psychology and smooth out the emotional highs and lows
  • Not letting a high price stop you from buying, and not letting a low price stop you from selling
  • Weissman’s concept of “the opaque urn”
  • The three things you can guarantee

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Wisdom from William Eckhardt

Posted on by Michael Covel

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?

Regardless of how you trade or invest … you better have those answers in advance of betting real money. Thank William Eckhardt for those perspective pearls. And yes–you answer with a number.

More on Pricetrader Bill Exkhardt.

How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Wall Street Jargon Defined from a Trend Following Perspective

Posted on by Michael Covel

A few of Wall Street’s favorite catch phrases need to be defined:

CTA: CTA stands for commodity trading advisor. It is a government term used to classify regulated fund managers who primarily trade futures markets. Almost all successful CTAs trade as trend following traders. CTAs are the other quants the media never seems to cover accurately.

Managed Futures: This is a term that describes regulated fund managers who use futures to trade for clients. It is an awful term because it fixates on the instrument (futures), not the strategy. Here’s the dirty little secret: Almost all successful managed futures trading firms use a trend following strategy. The term is often used interchangeably with CTA. Noted radio host and author Dave Ramsey recently had this to say about managed futures: “The term managed futures is virtually an oxymoron…with managed futures you’re basically betting on the future price of a commodity. What’s the price of gold, or oil, or wheat going to be somewhere down the road? You’re guessing as to what the future will bring, and managing a group of those guesses. What a joke!” If you share Dave Ramsey’s view and understanding, I recommend a full frontal lobotomy as your best wealth-building plan.

High Frequency Trading: High frequency trading is the latest term to describe arbitrage— at whatever time frame. It is about getting an advantage through speed and access. Most people are not going to enter the world of high frequency trading (or be Goldman Sachs). It’s a nonissue for your trading success.

Global Macro or Systematic Global Macro: Global macro is another term used to describe trend following traders, but indirectly. They do not say managed futures, and they do not say hedge fund, so it is global macro. It might make wealthy investors in Liechtenstein and Saudi Arabia feel more secure. The strategy is still trend following.

Hedge Fund: Think unregulated mutual fund that can trade in all markets up and down. Most hedge funds have terrible strategy: They are long only on leveraged stocks. That’s it. Not as sexy as the press makes it. Of course, it all depends, and some hedge funds do make a killing. Usually, they are of the systematic trend following variety.

Long Only: Long only means you make one bet. You bet that the market will always go up.

Buy and Hold: Buy and hold strategy (hope) is the same as long only.

Index Investing: You buy the S&P 500 Index and whatever it does is the return you get.

Value Investing: Attempts to use fundamentals to uncover undervalued stocks. The belief is you are buying cheap or low (terms that can mean anything to anyone). When that doesn’t work out, you call the government and ask for a bailout.

Quant: You use formulas and rules, not daily discretion or fundamentals to make trading decisions. That said, unless quant is defined with precision you can never know what it means exactly. Trend following is a form of quant trading.

Repeatable Alpha: Alpha is return generated from trading skill. If you buy and hold the S&P 500 Index, and if it makes a positive return, that’s not alpha. That return is beta for there was no skill involved. Repeatable alpha is simply the nice academic way of saying profit from skill. Trend following’s argument as the only repeatable alpha is tough to counter.

Beta: The return you get for accepting the average. There is no skill involved. Think about a monkey aimlessly throwing darts against the wall— it’s that level of skill. Long: You buy a stock or futures contract.

Excerpted from Trend Commandments.

How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Ep. 89: Tadas Viskanta Interview with Michael Covel on Trend Following Radio

Posted on by Michael Covel
Tadas Viskanta
Tadas Viskanta

My guest today is Tadas Viskanta, the founder and editor of the Abnormal Returns blog and a private investor with 20-plus years of experience. Viskanta calls his blog a “forecast free investment blog”.

The topic is his book Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.

In this episode of Trend Following Radio we discuss:

  • Investment philosophies and strategies to the challenges authors and bloggers face in the world today
  • Disadvantage given to those who follow the constant data stream from the media
  • Why Viskanta felt the need to write “Abnormal Returns”, and the strategy and style behind it
  • The phrase “abnormal returns” and trying to measure returns over and above the risk taken
  • Underperforming
  • Preparing for abrupt change in the markets
  • Viskanta’s move from value investing to a more systematic strategy–and Covel’s early experiences with value investing material
  • Now that so many global barriers are easy to cross, why so many people have “home bias” and difficulty placing global investments
  • Why people still look at the markets with rose colored lenses and so easily forget the bubbles of the past
  • The behavior gap
  • Why having a suboptimal strategy that you can follow in a systematic way is better than having no strategy at all
  • The ramifications of instant feedback in the blogosphere
  • Why you need a burning desire to be an author today

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Too Simple: A Big Reason Many Investors Miss Trend Following

Posted on by Michael Covel

An unexpected source explains why many miss understanding trend following trading:

If the explanations you’re demanding for what works aren’t working, perhaps it’s because you’re avoiding nuance in exchange for simplicity.

[For example], your boss keeps asking you to explain your whole plan in three Powerpoint slides. The VC who allocates one minute to understand why your business will work has done everyone no favors. The blog reader who clicks away after a paragraph wasted his time visiting at all.

Skip the complicated, time-consuming part at your own risk…If it were obvious, everyone would do it. Wait, that’s too simple. How about this: Nuance and subtlety aren’t the exception in changing human behavior. They’re the norm.

A great example of how some miss understanding trend following by avoiding the subtle? They see one losing month and panic. If you work with that type of quick judgement you would be better off taking the blue pill and going back to sleep. Seriously! That excerpt connected well with this article sent by a reader in Australia that pumps the mistaken notion that investors can predict trends:

He’s adapted Nate Silver’s model very unscientifically to the global news cycle, using it to compile a handpicked store of knowledge, which he then aggregates to get a feel for where markets are heading.

The system requires at least five or six different news sources ranging across left to right leanings to provide the sort of radar that will give an accurate fix.

You may think you don’t have time to manage this, but there are apps that make it easy. Pulse is one I use because it enables the collection and collation, in chronological and subject order, of top news of the day from nominated sources. My friend’s favourites include Salon, Slate, The Atlantic, Bloomberg, CNN and Huffington Post.

He spends part of every morning trawling through headlines and reading only what he deems relevant to provide a snapshot of where the world is at any given moment. Over time this has helped him develop an accurate read on how he might reposition himself across sectors.

“If you’re reading a variety of news sources, you definitely start seeing trends, especially as everyone’s saying the same thing just in different ways,” he says. Lots of cautionary stories generally mean something bad is about to happen.

“If you’re hearing the same thing from multiple sources, that’s generally when something’s going to happen,” he says. “Which is why I’m out of stocks. There’s no way they’re going to stay where they are. They have to come down.”

Isn’t this akin to timing the market?

“No. I’m just trying to predict a medium- to long-term trend. If you want to get rich quick, this isn’t the way to do it because it’s very macro.”

He admits his method is not totally straightforward, and that there may be quite a wide margin for error depending on nominated reading material and how clever the reader is it at distilling it. But do it for long enough and you will get better at it.

Read, absorb, think and learn. Then do it again, then again. And eventually you’ll be smarter, too.

If you think tracking news sources to predict market trends might possibly make you rich, then you will probably get exactly what you want from the process. What is that? To have the feeling of losing money! For those of you who want the subtle from me, the nitty gritty, read.

How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Why Trend Following Works

Posted on by Michael Covel

From SEB Asset Management S.A.:

If you believe that the world has changed for ever in such a way that there will no longer be any business cycles, that there will no longer be any severe crises situations (e.g. banking crises, government bond crises, real estate crises, junk bond crises, corporate bankruptcies, skyrocketing unemployment rates etc), that there will not be any large movements in the currency markets, that there will be no major political, social or military crises and that there will not be any major recoveries from such crises…in that case, you will not need any [trend following] investments in the portfolio. The [trend following]-strategy is a strategy that does well in a changing world. The changes may be positive or negative, but there needs to be extended movements in one or the other direction for [trend followers] to thrive….As a final and less research oriented reflection on the comparison between equity market performance and [trend following] performance, let me draw a parallel to rabbits and turtles (a famous group of [trend followers] were called ‘turtles’ as you may recall). Needless to say, rabbits are very quick over shorter distances. However, they are restless and often forget where they are heading. Most of the time, they stay above ground, but sometimes they go deep into the dirt. Turtles, on the other hand, are slower than rabbits over shorter distances, but they know where they are heading and keep moving in a very systematic and inexhaustible way. Turtles can get pretty old and can thus take advantage of their long experience. Over time they build and strengthen their shell, which–by the way–is the secret as to why they are able to travel long distances, not only on land in beautiful hot weather, but also when it starts to rain and when they need to swim through cold waters. The moral of the story is that one should never underestimate turtles. They have been around long enough to understand that investing is a marathon, not a sprint.

I substituted their use of the word CTA for trend following. Clearly, trend following is the dominant CTA style and that was the point of their comment. Plus, the word “commodity” is an artifact and misnomer. It’s the strategy, not the instrument.

Note: Shout to Alistair Evans for the find.

How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

• Trend Following Podcast Guests
• Frequently Asked Questions
• Performance
• Research
• Markets to Trade
• Crisis Times
• Trading Technology
• About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.