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Quick Trend Following Q&A: Price and Volume

Michael Covel on iTunes
Michael Covel on iTunes

Price is key when trading. Consider from, Trend Commandments:

Tell me something the “market” does not know. The idea that you can know enough about Apple, oil, GE, and gold to trade them all the same way may seem preposterous, but think about what they all have in common: Price.

Market price is objective data. You can look at individual price histories, without knowing which market is which, and still trade all successfully. That is not what they teach at Harvard, Wharton, Kellogg, Stern, Darden, or pick your favorite business school du jour.

However, the concept of price as the critical trading cue may be too simple for mass acceptance. For example, a prominent business anchor opined: “At some point, investing is an act of faith. If you can’t believe the numbers, annual reports, etc., what numbers can you believe?” A longtime financial reporter at Fortune magazine was also on the highway going the wrong direction: “If some of the smartest people on Wall Street can’t trust the numbers, you wonder who can trust the numbers.”

You can never trust those numbers—that is, the reported firm details—completely. Someone can always alter them (remember Enron had a fake trading floor). Beyond that, even if you know accurate balance sheet numbers, how does this help you determine when or how much to buy or sell?

The market is always right, and price is the only true reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the market is going up and you are short, the market is right and you are wrong. Other things being equal, the longer you stay right with the market, the more money you will make. The longer you stay wrong with the market, the more money you will lose.

You do not need to know anything about bonds. You do not need to understand different currencies. They are just numbers. Corn is a little different than bonds, but not different enough to trade them differently. Some people have a different system for each market. That is absurd. You are trading mob psychology. You are not trading corn, soybeans, or S&P’s. You are merely trading numbers.

Some feedback from a listener on price:

Dear Michael, I think that you have done a great work in explaining what trend following is. However, there are two great arguments that you have never faced:

1. You have always discussed price. I know that prices constitute a trend. Nevertheless, you should interview some of the main traders that [use] volumes. I would like to know how great traders interpret volumes as they are the first step for an incoming new trend. This study is lacking in all your work. It would be very helpful to know anything about that.

2. You have always talked about trends. It is correct. However, it is better to buy a stock that is likely to have a +200% uptrend than a stock that is only likely to have a +20% uptrend. So the questions is: how do great trend follower traders make their picks by relying their choice ONLY on prices and volumes?

I will wait for a polite answer of yours.

Kind regards,
[Name]

You can’t predict the next 20% v. 200% move. Impossible.

Volume? That is not the main topic of conversation in my trend following world.

Good place to start: Read (PDF).

More to read.


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Price Action is the Only Action… Don’t Get Distracted

Feedback in:

Hi Michael. Dan in Boston here, hope you are well. I’ve been devouring your podcast after I heard you on the Stansberry podcast. Thanks so much for sharing all the info / state of mind, it’s F%$ing awesome!

Question for you regarding dividends. Will you ever hold a stock that’s trending downward because it’s throwing off solid dividends? I know you can’t talk individual stocks (assuming you can’t) so I’ll just say I bought a BDC that’s throwing off a monthly dividend, annual rate is over approx 12%. I’ve got a few other BDCs all throwing off similar dividends which are generally trading sideways but I’m up on a couple of them. Seems like they are a hidden jewel that nobody cares about. I bought them after the were dis-included from the Russell 2000 ETFs so I got ‘em at rock bottom prices.

I bought the one I’m referring to before I discovered and began to knuckle down into trend following. It’s trending downward but very slowly. My technical indicators are obviously negative but they aren’t screaming toward the bottom, just very slowly shaving off a few cents per day. I may of course hit my stop, however it’s only about 15 cents shy of my buy price, and the dividend is keeping me slightly ahead and reinvesting it I’m still in the green. I’m adjusting my stops to reflect that as well, so either way if I stop out I’m not gonna get hurt too badly, if at all.

Question is do you ever factor dividends into your trend following? I probably answered my own question as I’m still making money on the stock, but would love to have your feedback.

Keep up the great work man, I just finished chapter one of the Little Book of Trend Following and I’m sure within the next few months I will read all your books. I too believe people are sheep and freeloading off the system, I’m an entrepreneur anyway, so trend following is a natural extension of my life.

Cheers
Dan

Thanks Dan for the nice words! Let me keep it simple–judge the trade by price action always (not dividends). Holding onto a losing stock because it is spinning off a dividend is not trend following. Perhaps, the math works and it is ok for your situation, but it’s just not 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.

You Want It All “Cheap”?

You want it all “cheap”?

No.

Wrong way to think.

For example, if you enter a market at price level 50 and it goes to 100, does it really make a difference whether you got in at 52 or 60 or 70? Even if you got in at 70 and the market went to 100, you still made a lot, right? There are plenty of traders out there who think: “Oh, I couldn’t get in at 52, so I won’t get in at all.” Even if you had the chance to get in at 70 on a market that eventually goes to 100, some sit on the sidelines still dreaming of buying ‘cheap’!


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.

Paraphrasing Richard Feynman on “Price” Importance

Trend followers trade the “price”. It’s the number that can’t be faked, the real indicator of the past, now and the future. Richard P. Feynman adds:

“You can know the name of a bird in all the languages of the world [think of all those so-called market fundamentals], but when you’re finished, you’ll know absolutely nothing whatever about the bird…So let’s look at the bird and see what it’s doing — that’s what counts.”

What is the market doing right now? That’s what counts. The price.

richard feynman


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.

Price Action is How to Make Money

So true:

Thanks Kevin Vandermeer for the find!


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
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Performance
Research
Markets to Trade
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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.

Picking which shares to buy and sell is not necessarily about being right all the time.

From an article:

This leads into the second finding: picking which shares to buy and sell is not necessarily about being right all the time. Even the best fund managers are frequently wrong, and Lagrange estimates his team are correct between 45 and 65 per cent of the time. The trick is to make more money when they are right than they lose when they are wrong. From Savage’s analysis, he says his team makes 1.1-1.2 times more when right than they lose when they are wrong – enough to make good money even if their odds of being right are no better than 50/50.

Trend following 101.


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.

Right and Wrong

A recent conversation:

Luis: Hi Michael this last podcast is really amazing with Harry Dent. To be honest I live in Portugal and I don´t know what we need more to open our eyes from our Global State of Coma. Keep going with this amazing podcast.

Michael: Why did you like this one so much?

Luis: It is amazing that you keep explaining the manipulation in so many different ways and we just can´t see. And this one is from a more fundamental I hope more people understand now people just love this kind of numbers.

Michael: Some people think it is bad to discuss these issues–trade price alone they say. Sure trade the price for trading, but we as human beings can’t keep ignoring what is the appropriate way to run societies. There is a right and wrong.


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.