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Trend Following Good News; Bad News

Good News Bad News
Good News Bad News

[Trend Following] fills a void in a marketplace inundated with books about buying low and selling high, index investing, and all other types of fundamental analysis, but lacking any resource or, for that matter, practically any reference to what I believe is the single best strategy to consistently make money in the markets. That strategy is known as trend following. Author Van Tharp has described it succinctly:

“Let’s break down the term ‘trend following’ into its components. The first part is ‘trend.’ Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices … ‘following’ is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then ‘follow’ it.”

Trend following trading seeks to capture the majority of a market trend, up or down, for profit. It aims for profits in all major asset classes—stocks, bonds, currencies, and commodities. Unfortunately, however simple the basic concepts about trend following are, they have been widely misunderstood by the public. My desire to correct this state of affairs is what, in part, launched my research. I wanted to be as objective as possible, so I based my writing on all available data:

• Trend followers’ month-by-month performance histories

• Trend followers’ published words and comments over the last 30 years

• News accounts of financial disasters

• News accounts of the losers in those financial disasters

• Charts of markets traded by trend followers

• Charts of markets traded by losers in the financial disasters

If I could have written books comprising only numbers, charts, and graphs of trend following performance data, I would have. However, without any explanation, few readers would have appreciated the ramifications of what the data alone showed. Therefore, my approach to writing Trend Following became similar to the one Jim Collins describes in his book Good to Great, in which a team of researchers generated questions, accumulated data in their open-ended search for answers, and then energetically debated it.

However, unlike Collins who was writing about generally well known public companies, trend followers form a sort of underground network of relatively unknown traders who, except for an occasional article, the mainstream press has virtually ignored. What I have attempted to do is lift the veil, for the first time, on who these enormously successful traders are, how they trade, and what is to be learned from their approach to trading that we might all apply to our own portfolios.

Trend Following challenges much of the conventional wisdom about successful trading and traders. To avoid the influences of conventional wisdom, I was determined to avoid being influenced by institutionalized knowledge defined by Wall Street and was adamant about fighting “flat earth” thinking. During my research, starting with an assumption and then finding data to support it was avoided. Instead, questions were asked and then, objectively, doggedly, and slowly, answers were revealed.

If there was one factor that motivated me to work in this manner, it was simple curiosity. The more I uncovered about trend followers, the more I wanted to know.

Feedback from a listener:

Hi Michael.

I’ve been listening to your awesome podcast for a few months now and it has intrigued me quite a lot. Thank you so much for putting it up out there.

I never really thought about money before. I’m one of those suckers who has been keeping the money in the bank, too skeptical of financial advisers, too afraid and ignorant of the stock markets. At some point obviously I started to realize that I needed to be in control of my savings and start planning my future. I’ve been reading a lot about the markets, but nothing makes as much sense as your words.

Despite understanding your message (at least I think I do), I actually don’t know how to exactly implement that way of thinking on a personal strategy. I am a dentist living in London, 2 small kids at home, so not a lot of time on my hands. I have been putting some of my savings on a buy and hold strategy with Vanguard equity funds. But without a doubt I am dependent on market timings and on the hope things will always “get better.” And that doesn’t seem to be very sensible.

So, I am contacting you in the hope you could help me to have some more clues on how to start on a trend following strategy that could fit my circumstances.

With great admiration,

My father is a dentist. I feel a kinship! Good news and bad news: Good? Trend following can help anyone. Bad? Need to do some prep. Here are some starters: Start Now and an Intro Video.

Push Hard if You Want It!

If you want to meet anyone bad enough you will meet them. Recent feedback in:

TJ: Ever met Michael Marcus? How do you get to meet a guy like that? At least he is in So Cal and not Chicago!

Covel: Austin, Texas I thought. Meet? If you want it bad enough you will.

TJ: Humph, he must have moved. Yes, we can have anything we want if we are willing to pay the price.

I doubt he will meet him.

Note: I talk about these issues across my podcast, books and blog. Also, read Linchpin.

Michael Covel Meets Mikhail Gorbachev: The Digging Story

michael covel

An excerpt from my book The Complete TurtleTrader:

Taking very little at face value is my modus operandi. In fact, since childhood I’ve challenged the accepted norms regarding access to the truth. Along the way I’ve challenged a number of people who have wanted to keep the curtains closed. In this small world, one of the more unlikely people to have asked me, “How do you go about unearthing details?” was Mikhail Gorbachev.

The former president had been told in Russian that I write about men who trade big money, so when we were introduced he asked me in Russian, “What is it like to write about these men?” Realizing his time was limited, I kept it short: “Very interesting.” He waited for the translation. “It must be difficult to get behind the scenes; how do you do it?” I smiled, “Oh, I am very good at digging.” He laughed. No translation needed there. He understood my English perfectly.

Walking into the world of Turtles was not planned. It was an unconventional journey. Spring 1994 was the “get your act together, now is the time” year for me. I had just finished an MBA at Florida State, having spent my final semester in London studying international relations.

Back in the States, armed with the so-called prerequisite advanced degree and a deep desire to become rich, Wall Street called. Unfortunately, Virginia, my home state, was not the place to start looking for a mentor or an opportunity that would lead to big money. Most of my friends were products of government workers, not the types looking beyond security or “fitting in.”

So, I tracked down one of the few Florida State alums on Wall Street, recently retired James Massey. He had made millions at Salomon Brothers and was memorably portrayed in Michael Lewis’s classic Liar’s Poker:

[Jim] Massey…was John Gutfreund’s (the then CEO) hatchet man, an American corporate Odd Job. It didn’t require a triple jump of the imagination to picture him decapitating insolent trainees with a razor-edged bowler hat. He had what some people might consider an image problem: he never smiled…Trainees feared Massey. He seemed to prefer it that way.”

At lunch, Massey did not say a word. After a half hour the conversation was speeding downhill. Astute enough to see my sink or swim predicament, I said [bluntly]: “Have I said anything so far that makes you think I am full of shit?”

That got his attention. “Yes, you said you wanted to be the best. You don’t want to be the best; you just want to win.” Massey, like any good coach, was offering the reminder that winners play harder than anyone else.

As fate would have it, I didn’t get hired at Salomon Brothers, but right after meeting Massey, the word ‘Turtle’ crossed my desk for the first time. Shortly thereafter, in 1996, long before, Google, and millions of blogs, I was there at the start of TurtleTrader — a controversial website designed to teach trend following and Turtle trading. It ended up becoming one of the most popular financial websites in the world and was ultimately the start of this book.

One of my goals has always been to make people think twice. That attitude has made me a target, but I was a baseball catcher so I am used to taking the shots. I often face intense reactions because I represent the other side that’s never considered. Ten years of digging and reporting have produced my fair share of critics, some legit, some off the wall. I am a messenger and people love to shoot messengers.

At the end of the day, this was not the career direction I’d originally planned as a freshly minted graduate. However, sitting at the nexus of access and insight from some of the best trading minds on the planet has become my singular passion — for now.

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