Michael Covel goes on to review four things that have recently hit his desk that highlight the misinterpretations of trend following and trading in general. The first, regarding a speaking gig in Beijing, concerns itself with distinguishing between reality and unreality. The second comes from Teller, of Penn and Teller fame. Covel goes on to discuss whether a trading system should be specifically designed to suit your personality–something Covel doesn’t necessarily agree with. He gives examples of the Turtles, AHL of London, Larry Hite, Ken Tropin–all traders who have different personalities but are similar in their systematic approaches. It’s not about whether trend following trading “fits” your personality–it’s about the fact that it works and there is performance data that proves it. The third example comes from a listener, and Covel discusses time decay and “choppy markets”. The fourth comes from Jim Rohrbach, who put a piece out in late December in which he caught a radio show that stated “the stock market is always right”. Paraphrasing Rohrbach, Covel notes that the market does what it wants to do. When the market doesn’t do what a trader thinks it should do, they insist the market is wrong. We may not like or agree what the market is doing any any particular time, but it’s futile to say the market is wrong or to invest opposite the market. It’s as simple as being long when the market is going up, and being short when it’s going down. Of course, you need rules to deal with that: choppy markets, knowing when to exit, and keeping losses to a minimum–that’s what Covel teaches.
A good reminder:
Opalesque: You have some winning trades, some losing trades, how do you know you’ll come out ahead?
Trend follower Ken Tropin: In this business you need to have ample payoffs from your winning trades but make sure your losing trades do not generate big losses—so the returns have a fat right tail but not much left tail! Suppose over time you make money on half your trades and lose money on the other half. If the winning trades are double the size of the losing trades, then you have a pretty profitable investment.