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Category: Trading 101

Tom Brady: Trend Following Trading Insights

Posted on by Michael Covel

Sports lessons applied to trading:

Told another time by reporters that Brady attended a Broadway show instead of watching the Jets-Colts playoff game that would determine New England’s next opponent, Ryan quipped, “Peyton Manning would have been watching our game.”

What Ryan and others have never seemed to grasp, one of Brady’s former teammates explains, is that Brady has always been smart enough to accept that it’s impossible to know everything. That’s why he’s the best postseason quarterback of all time. (Brady holds the record for most playoff wins, yards and touchdowns.) That’s why he obsesses over the simple fundamentals of playing catch, drilling for hours and hours in the offseason with guys like Edelman and former teammate Wes Welker on stuff as basic as ball position and splits. A player can study film and look at 10,000 formations on an iPad for as many hours as the eyes and the brain will allow. But ultimately, the human mind is not a computer. Overthinking in tense moments, trying to decode a defense like it’s a sudoku puzzle, is the perfect recipe for hesitation and panic.

“You know, Brady probably doesn’t watch as much film as Manning, and that’s OK,” said Brady’s former teammate. “You know why? Because he’s got coaches that are watching just as much film as [Manning] is. What Brady gets is that he’s the only guy who understands exactly what’s going on down on the field. So when Josh McDaniels calls a certain play, Brady is thinking: ‘I know exactly why he called that play. I know exactly what my read is on this.’ Brady’s genius is that he understands delegation. He trusts the people around him.”

Indeed. More.

Source: Kevin Van Valkenburg, Tom Brady’s big reveal. ESPN, January 22, 2016. See http://espn.go.com/nfl/story/_/id/14615476/new-england-patriots-qb-tom-brady-big-reveal.

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Ed Seykota on Trading Heat

Posted on by Michael Covel

Ed Seykota adds:

Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.

Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure — or heat — from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2% on each of five instrument & has a total heat of 10%, as does a portfolio risking 5% on each of two instruments.

Our studies of heat show several factors, which are:

1. Trading systems have an inherent optimal heat.

2. Setting the heat level is far and away more important than fiddling with trade timing parameters.

3. Many traders are unaware of both these factors.

Don’t know yet? Dig in.

Enjoy one of my interviews with Ed Seykota here.

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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.

Good Trading Does Not Equal Get Your Rocks Off Excitement

Posted on by Michael Covel

As George Soros put it:

If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.

Such straightforward wise advice and so ignored by millions.

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.

No Memory Trading Courtesy of TurtleTrader William Eckhardt

Posted on by Michael Covel

William Eckhardt, the great trend-following trader, has spoken forcefully about the idea of not having a memory in your trading:

“Suppose two traders, A and B, are alike in most respects except the amount of money they have. Suppose A has 10 per cent less money but he initiates a trade first. He gets in earlier than B does. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn’t know what his initiation price is.”

Don’t forget it.

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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.

Ewan Kirk of Cantab on Trend Following

Posted on by Michael Covel

Excerpt:

Our philosophy rests upon two main pillars. The first pillar is: macro, not micro. So we trade macro variables, not stocks and shares and credit default swaps and things like that. We trade across currencies, commodities, interest rates, bonds and equity indices. The second pillar is: a systematic approach, not a discretionary approach. So we describe our style as systematic global macro. Systematic trading involves coming up with a statistical model of the markets. Assuming that model has worked in the past, and that you have developed and researched and tested your model correctly, then your hypothesis is that it’s likely to keep working in the future. So the actual execution of trades is just continuing to follow what the model says. Now that sounds quite mechanical. In fact, it’s no different than the way any good investor works. Why would you invest with Warren Buffett? Because, over the past 30 years, Warren Buffett has made money, and you’re assuming that’s going to continue in the future. Conceptually, that’s no different than what we do.

When I use the term “scientist” to describe myself and my colleagues at Cantab, what I’m really talking about is a mindset. It’s a mindset of evidence based investing and using the scientific method to think about investing. The scientific method has worked pretty well for the human race for the last 2,000 years—it’s worked out better than superstition, anyway. And we believe in applying the same rigorous principles as in medicine or air traffic control. Everyone is quite happy with evidence-based medicine and air traffic control—would you fly in a plane controlled by someone who just had a gut feeling about where they wanted to go?

When people ask: What do you think is going to happen in the future? We always say: We don’t know. I can’t really project whether next year will be a good year for Cantab or a bad year.

Ignore at your peril.

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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.

Paul Tudor Jones: The Moving Average Wins

Posted on by Michael Covel

Wisdom:

“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: ‘How do I keep from losing everything?’ If you use the 200-day moving average rule, then you get out. You play defense, and you get out.” –Paul Tudor Jones, as interviewed by Tony Robbins

You won’t find the answer on TV. More on the Paul Tudor Jones book can be found in this aeticle.

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.

Ep. 466: Don’t Worship the Computer with Michael Covel on Trend Following Radio

Posted on by Michael Covel
Don’t Worship the Computer with Michael Covel on Trend Following Radio
Don’t Worship the Computer with Michael Covel on Trend Following Radio

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Please enjoy my monologue Don’t Worship the Computer 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:

  • “Super computers”
  • Systematic trading
  • Creating algorithms
  • Coding
  • Machines replacing humans
  • Breaking down the use of software

“…The power of computers owes nothing (save speed) to the causal peculiarities of electrons darting about on silicon chips…” – Daniel Dennett

“Trend following trader = CPA not AI singularity theorist.” – Michael Covel

Mentions & Resources:

Listen to this episode:

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