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Wise Price Trading Words from William Eckhardt

From William Eckhardt:

“An important feature of our approach is that we work almost exclusively with price, past and current. One reason for this is that to make any progress in the early stages of quantitative investigation you usually have to reduce the relevant factors to one or two crucial variables. Price is definitely the variable traders live and die by, so it is the obvious candidate for investigation. The other reason is that in a system that’s making good use of price information, it is very difficult to add other information without degradation. Pure price systems are close enough to the North Pole that any departure tends to bring you farther south.”

Bill Eckhardt trader
The TurtleTrader Bill Eckhardt. Photograph from TurtleTrader.com

More from a conversation never heard on CNBC:

“Many systematic traders spend the majority of their time searching for good places to initiate. It just seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprisingly well with a good liquidation criterion. In contract, random liquidations will kill the best system.”

More from Pricetrader Bill Eckhardt can be found in my 2nd book.


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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.

Survivorship Bias: An Academic Charade to Ignore Trend Following

From Wikipedia:

“Survivorship bias is the logical error of concentrating on the people or things that “survived” some process and ignoring those that didn’t.”

From the Wikipedia entry on me:

“Critics of Covel point out that his studies do not address survivorship bias.”

I challenge anyone to show me where the trend following failures are not outlined in my second book (as but one example). Not only are they outlined, the “whys” are explored.

Bottom line, if you are going to raise the flag of survivorship bias when discussing trend following, like Jim Cramer protégé David Merkel, you need to name those exact failures and outline the reasons for failure. Just saying there were failures, without being specific to anything, is a charade.


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.

Mikhail Prokhorov on too Much Information and Why Snowflakes Have No Relevance to Trading Succes

Feedback in:

“Hi Michael, do you think that hidden divergence is a good indicator of trend continuation after a retracement? Thanks in advance.”
Regards,
Jeff

Jeff, exact definitions of ‘hidden divergence’, ‘trend continuation’ and ‘retracement’?

“Hidden divergence is defined as follows (from http://www.babypips.com/school/hidden_divergence.html): If price is making a higher low (HL), but the oscillator is making a lower low (LL), this is considered hidden bullish divergence. If price is making a lower high (LH), but the oscillator is making a higher high (HH), then you have hidden bearish divergence. In a market that trends in a particular overall direction, the main trend is typically punctuated by periods where the market goes in the opposite direction of the main trend (forgive me if this is stating the obvious). ‘Retracement’ is when the market goes in the opposite direction to that of the main trend, and ‘trend continuation’ is a return to that main trend following a retracement.

Jeff, I am not sure how it is all relevant to trend following!

“Fair enough! Incidentally, do you think this difficulty in translating into mathematical formulas what is obvious to the human eye might explain why hedge funds haven’t sacked their technical analysts and replaced them with computers? :)”

In my book I talk about predictive and reactive technical analysis. The later is trend following. The former is BS. Some, just like BS. 🙂

“I’ve just had a look at your book. Is the distinction that predictive TA looks at things like Fibonacci numbers and Elliott waves, whereas reactive TA is simply interested in jumping onto an existing trend and staying with it until it shows signs of coming to an end?”

I like my explanations better, but I think you get it.

“I read a book called Trading Chaos a while back, in which the authors talked about physics and the prevalence of fractals in nature. It was all very interesting, but I struggle to see the relevance of the properties of a snowflake to any market, either brick or virtual!”

There is no relevance! This conversation with a reader of mine reminded me of a recent article about the new owner of the Nets: Mikhail Prokhorov. Prokhorov has told the world that he avoids the internet:

“I don’t use a computer. We have too much information and it’s really impossible to filter it.”

Bill Simmons, in his article on ESPN, adds:

“You know what? He’s not necessarily wrong. Do we REALLY need all this information? Like, right now — you’re reading this column and hopefully enjoying it, but ultimately, could you have survived the weekend if you missed it? I say yes. Just about everything online fits that mold — you have to sift through loads of bad writing and irrelevant information to find the occasional entertaining/funny/interesting thing, and even then, it’s not something that’s making or breaking your week. Ever been on a vacation and had little-to-no Internet access that week? You survived, right? Maybe the big Russian is on to something.”

Exactly. Isn’t that paragraph a great explanation as to why purveyors of too much analysis…are [expletive]? Its a great endorsement of trend following.


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.

The Magazine Indicator

In the last few weeks the media has gone ‘all in’ on recovery. All is rosy. The Dow is up. Good times are back! And when the media goes all in many love to point out (me included) that the magazine cover indicator is often great contrary evidence to where we are really headed.

That said, the cover indicator is more fun than substance. Meaning, trend followers don’t build into their technical trend following systems the cover indicator. So it sounds great, and the psychology behind it makes sense, and sometimes it works out, but if the numbers of your system don’t say to do something — sitting still is the best course of action.


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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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.

“Speculation is Evil… You Greedy Bastard Covel!”

Alexander Ineichen writes:

“The financial crisis was not ’caused’ by a single event or a single group of investors. More likely, a series of conditions needed to be met for the dominos to fall one by one and the system to crack. The idea that hedge funds were the first stone to fall and thereby causing the chain reaction, seems infinitely improbable from what we know today. However, a disproportionate amount of regulatory zeal and political energy is spent on regulating ‘alternative’ funds. This we find odd, especially given that the ‘too big to fail’ issue is the single most important aspect related to systemic risk and is far from being resolved.”

He adds:

“Politicians blamed speculators for ‘causing’ oil to go to $147. However, politicians didn’t thank speculators for ‘causing’ oil going back to $35. This seems odd. In the Greece situation, it’s again the speculators who get blamed. Bismarck often remarked that if one likes laws and sausages it is best not to see them being made. This is probably also true for the price mechanism in a free market economy, as the impact of the market responding to bad news isn’t always pretty.”

Ineichen stop being so right.


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.

Why You Should be a Systematic Trend Follower

Want to be a millionaire? Start thinking and acting like one! That means joining the minority who make sound moneymaking decisions every day. How? First, understand that there are no free lunches. Second, all traders must pass through the enlightenment barrier before they can win big and it all starts with superior investor education:

Profit in Up and Down Markets:
Trend following doesn’t swear an allegiance to a bull or bear market. It follows trends to the end. No matter how ridiculous trends might appear early and no matter how insanely extended they might appear at the end, follow trends. Why? Because they always go further than anyone expects. Ignore momentum at your peril.

No More Buy and Hold, Analysts or News:
Trend following decision-making doesn’t involve discretion, guesses, ‘gut’ feels or hunches. It’s not day trading or buy and hold (hope). It doesn’t involve passive indexing, in and out trading or fundamental analysis. No more 24-hour news cycles, daily turbulence or sensational hype. No black boxes or magic formulas either. Hope is the most addictive drug. Let go of the Holy Grails. The good news? Complete beginners can learn trend following.

No Prediction:
Trends exist everywhere, always coming and always going. Whether fashion, business or whatever, we all want to find trends and ride them as far as they can go. Markets are no different: they trend up and down too. That said, no one can predict a market trend, you can only react to them. Trend following never anticipates the beginning or end of a trend. It only acts when the trend changes. However, there is no need to figure out ‘why’ a market is trending — just follow it. You don’t need to understand electricity to use it!

The Big Money of Letting Profits Run:
Trend following aims to compound absolute returns. It doesn’t shoot for ‘average.’ Do you really want to be exactly like your neighbor? The goal is to make the big returns, not generate passbook savings returns. Trend following also has the unique ability to lie in wait for ‘targets of opportunity.’ That means ‘outlier’ events (read: unpredictable surprises like the 2008 market crash) can make you huge money.

Risk Management is Top Priority:
Trend following always has defined exit protocols to control ‘injury’ to your account. Stop losses and proper leverage usage are standard practice. Trend following also has low to negative correlations with most other investment opportunities. It eliminates exposure to group think and toxic assets. Eliminating exposure is a winning move whereas hedging can actually increase your exposure. Trend following is the best protection for when bubbles pop and everyone starts running for cover.

Takes Advantage of Mass Psychology:
Markets, which are always changing, are only our subjective expectations reflected objectively. Interestingly, people’s reactions to change always remain the same (i.e., they bet wrong as a group). Trend following takes advantage of ‘panicky sheep’ behavior to make money. How? Strict discipline minimizes behavioral biases. It solves our eagerness to realize gains and reluctance to crystallize losses. Let’s face it too many people believe what pleases them and social conformity means that even if the group is wrong, we go along. Most behaviors are simply driven by the impulsive moment of now. They aren’t purposeful, thought-out choices. Trend following wins because of that.

Scientific Approach to Trading:
Trend following doesn’t require a belief, but rather it relies on unwavering principles proven over decades. It has a defined edge just like the MIT card counting team that beat Vegas casinos (read: mathematical game theory from the movie ‘A Beautiful Mind’). Be the casino and not the hapless player! How? Trend following uses hard rules rooted in numbers (think process not outcome). And remember, frequency of correctness does not matter, the magnitude of correctness matters! ‘Winning percentage’ means zilch. How much time will trend following take? No staring at the screen drinking ‘Red Bulls’! Once you are setup, minutes a day is all you need when you approach trading like an engineer.

Strong Historical Performance in Crisis Periods:

Trend following prepares for the worst at all times. It is adaptable to differing climates and environments performing best during periods of rising volatility and uncertainty. Guess what? The unknown will happen again! Are you ready? You have to be able to ride the bucking bronco while also riding the storm out. But that said, the day you have to do something, you are screwed. Trend following, like a lion waiting to strike wounded prey, is very patient.

No Traditional Diversification:
Trend following is not restricted to any single market or instrument. A focus on ‘price action’ allows trend following to be applied to an exceptionally large variety of markets. Price is the one thing that all markets have in common. That means a system for treasury bonds will work on the Euro too. And if you switch it over to coffee, something totally different than treasury bonds, it still works. Trend following is robust! But don’t expect the ‘tape’ to lecture you. You have to trust your buy and sell signals and follow all rules.

No Government Reliance:
Forget Social Security, bailouts, stimulus plans and roads to nowhere. Those won’t help you to make money, but they might help you to lose money. When the Fed takes the ‘training wheels’ off the economy will you be ready to mint cash or will you just sit there and take it again? If your portfolio is grounded in sound principles you can win, but the government has nothing to do with sound anything!

The market does not care about you or know you. It doesn’t care about your dreams or desires. It is the ultimate authority so you better listen to it.


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.

Close Enough to the North Pole

An excerpt from my Turtle book that I like:

No matter what ‘price’ is the variable that the great traders have lived and died by for decades. Making trading decisions more complicated than the simple heuristic of ‘price’ has always been problematic. Eckhardt knew it was hard to do much better: “Pure price systems are close enough to the North Pole that any departure tends to bring you farther south.”


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.