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Category: Risk Management

“This is my retirement money. I can’t afford to be out of the market anymore!”

Posted on by Michael Covel

John Hussman writes about investors with no plan who buy at the top, panic, sell, and get killed:

“This is my retirement money. I can’t afford to be out of the market anymore!”

“I don’t care about the price, just Get Me In!!”

“It’s a healthy correction”

“See, it’s already coming back, better buy more before the new highs”

“Alright, a retest. Add to the position – buy the dip”

“What a great move! Am I a genius or what?”

“Uh oh, another selloff. Well, we’re probably close to a bottom”

“New low? What’s going on?!!”

“Alright, it’s too late to sell here, I’ll get out on the next rally”

“Hey!! It’s coming back. Glad that’s over!”

“Another new low. But how much lower can it go?”

“No, really, how much lower can it go?”

“Good Grief! How much lower can it go?!?”

“There’s no way I’ll ever make this back!”

“This is my retirement money. I can’t afford to be in the market anymore!”

“I don’t care about the price, just Get Me Out!!”

Obviously, he is not a price based trend following trader, but his understanding of trading psychology dovetails nicely with trend following.

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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.

Thinking About Winning and Losing

Posted on by Michael Covel

The guy who wins the most hands is not the guy who makes the most money in the long run. The guy who never loses a hand is not the guy who makes the most money in the long run.

Think about it. Or don’t.

Note: Shout to Tony Hsieh for the words. My film takes the thought further.

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. 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

Listen to this episode:

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The Illusion of Control: Dancing with Chance

Posted on by Michael Covel

From INSEAD:

First you accept that there are things you can’t control. Then you try to assess the uncertainty and finally augment your plan to make sure you manage risk more effectively.

That means using models, independent opinions, internal and external advice and any other means to assess the unknown risks and to make your business nimble and open to change when the unexpected happens.

“You are better off focusing your energy on planning for the range of possibilities that could actually happen.”

For example, he says it’s very difficult to tell which start-up businesses will be successful in the early stages. If you accept that, a better strategy is to try to diversify over a number of projects just as venture capitalists do. Not all the projects will pay off but you diversify your risk so that you have a better chance of nurturing one that will succeed.

Chance and randomness play a significant role in business and in our lives. “The point is not that the world is hopeless and you shouldn’t do anything, it’s just that we should do a more careful assessment of what we can predict and what we can’t predict. And where we can’t predict then the effort and the resources are better spent on planning,” Gaba told INSEAD Knowledge.

“Instead of trying to predict this, which you actually cannot, you are better off spending your resources and effort on planning for various contingencies.”

And when it comes to managing risk in investing, the authors have pillars of wisdom: “Be average. Be patient. Be risk aware. Be balanced.”

Another vantage to consider? “What can we learn from expert gamblers?”

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.

Too Much Data Is Toxic–Trend Followers Get This Terribly Important Principle Deep in Their Gut

Posted on by Michael Covel

An excerpt (source):

In business and economic decision-making, data causes severe side effects —data is now plentiful thanks to connectivity; and the share of spuriousness in the data increases as one gets more immersed into it. A not well discussed property of data: it is toxic in large quantities —even in moderate quantities.

More:

The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio. And there is a confusion, that is not psychological at all, but inherent in the data itself. Say you look at information on a yearly basis, for stock prices or the fertilizer sales of your father-in-law’s factory, or inflation numbers in Vladivostock. Assume further that for what you are observing, at the yearly frequency the ratio of signal to noise is about one to one (say half noise, half signal) —it means that about half of changes are real improvements or degradations, the other half comes from randomness. This ratio is what you get from yearly observations. But if you look at the very same data on a daily basis, the composition would change to 95% noise, 5% signal. And if you observe data on an hourly basis, as people immersed in the news and markets price variations do, the split becomes 99.5% noise to .5% signal. That is two hundred times more noise than signal —which is why anyone who listens to news (except when very, very significant events take place) is one step below sucker.

More:

To conclude, the best way to mitigate interventionism is to ration the supply of information, as naturalistically as possible. This is hard to accept in the age of the internet. It has been very hard for me to explain that the more data you get, the less you know what’s going on, and the more iatrogenics you will cause.

Trend followers tackle the issues raised by Taleb by making their trading decisions off the market price. Boom–one piece of data for all of your trading decisions–price.

Article Source: Ritholtz.com.

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:

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• Frequently Asked Questions
• Performance
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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. 22: Mike Aponte Interview with Michael Covel on Trend Following Radio

Posted on by Michael Covel
Mike Aponte
Mike Aponte

You can listen to my interview with famed MIT card counter Mike Aponte:

My guest today is Mike Aponte, a professional blackjack player and a former member of the MIT Blackjack Team. Aponte was featured in the bestselling book “Bringing Down The House” as the player Jason Fisher, which was adapted into the movie “21”.

The topic is investing.

In this episode of Trend Following Radio we discuss:

  • Due to his systematic approach, he’s definitely not a gambler; he’s an investor
  • Aponte’s beginnings
  • The similarities between systematic card counting and trend trading; the psychology behind the two
  • How even some of the more advanced mathematicians at MIT didn’t have the risk-taking constitution it took to make the cut
  • Some revealing anecdotes along the way, including a run in with casino security that ended with them actually asking for his autograph

Listen to this episode:

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Risk, Volatility and Returns

Posted on by Michael Covel

Ed Moy turned me onto a whitepaper that trend followers will find of interest: PDF.

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.