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Parabolic Moves and Trend Following

Follow the trend to the top and get out as it is falling back down. Predicting the top is a fool’s errand. Feedback in:

James: Hi Michael, hope you are well and Asia is treating you well. You did a podcast with someone (can’t recall his name) and they mentioned taking profits in parabolic moves. Not much help I know but it is all I have. I was wondering if you could recall who it was or if you have any info for taking profits in these types of moves. More than happy to let normal moves roll over and let my trailing stop take me out but some of these parabolic moves give back too much. It is the one part where I believe I can add that extra % to my trading but have not been able to find any trading rules that adds any value. Any help [is] much appreciated. Thanks.

Covel: Don’t recall off top of my head! All good trend following trends tend to be parabolic and all are generally handled the same way. You get out after the peak, not before. I help clients more in my training/systems, but you will also see more thoughts across my books.

James: Thanks for the reply. I know I did not give you much to go on. Will keep looking.

Look Before You Leap Is Mission Critical

An excerpt from my first book, “Trend Following”:

Trend following, like any entrepreneurial endeavor, demands you to be responsible for yourself. Charles Faulkner emphasized the point: “Trend trading and even trading in general isn’t for everyone. As too few people check out what the day-to-day life of a trader is like, and trend trading specifically, I strongly recommend they find out before making a life changing commitment.”

What does “life changing commitment” involve? You commit to not wanting to be right all of the time. Most people, let’s face it, must be right. They live to have other people know they’re right. They don’t even want the success. They don’t want to win. They don’t want money. They just want to be right. The winners, on the other hand, just want to win.

If you don’t want to win–on something in life–go jump now.

Note: Charles has been one of my most popular podcast guests. He will be on soon again.

Is Your Only Strategy “Trust”?

Peter Schiff states:

“The Fed’s failure yesterday to announce some sort of tapering of its QE program, despite the consensus of an overwhelming percentage of economists who expected action, once again reveals the degree to which mainstream analysts have overestimated the strength of our current economy. The Fed understands, as the market seems not to, that the current “recovery” could not survive without continuation of massive monetary stimulus. Mainstream economists have mistaken the symptoms of the Fed’s monetary expansion, most notably rising stock and real estate prices, as signs of real and sustainable growth. But the current asset price bubbles have nothing to do with the real economy. To the contrary, they are setting up for a painful correction that will likely be worse than the one we experienced five years ago. Following this playbook, the Fed will likely maintain the pretense that tapering is a near term possibility and that it has a credible plan on the shelf to bring an end to QE. In reality the Fed is stalling for time and hoping that the economy will inexplicably roar back to life. Unfortunately, hope is not a strategy.”

Stanley Druckenmiller (from Zero Hedge) states:

“A stock market at an all-time high would suggest we don’t have a problem with financial conditions.” In fact, Druckenmiller continues, the Fed “blew it… they had a freebie,” they could have started the process to “get us off the dope.” This action, or inaction, he warns “is going to make it so much harder for the next Chairman to start the process.” In fact, he concludes, that from beginning to end – once markets adjust from these subsidized prices – that the wealth effect of QE will have been negative not positive…this has forced us to buy securities at subsidized prices and when they adjust, at whatever point in the future, they will adjust immediately and on no volume.”

I don’t know the timing of when their wisdom will unfold, they don’t either.

But it will.

And what will you do?

Do you have a plan beyond trusting daddy government to tuck you in at night?

Nassim Taleb on Buffett v. Soros

Nassim Taleb:

Asked…if returns such as those posted by Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett — who amassed the world’s third-biggest personal fortune through decades of stock picks and takeovers — are the product of luck or talent, Taleb said both played a part. If given a choice between investing with Buffett and billionaire investor George Soros, Taleb also said he would probably pick the latter. “I am not saying Buffett isn’t as good as Soros,” he said. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”

Much wisdom there. More.

Managed Futures Describes an Instrument, Not the Strategy. It’s Trend Following

Wall Street types love to call trend following trading ‘managed futures’. That makes no sense. Futures are an instrument, NOT a strategy. The largest so-called managed futures firms are trend followers. If you want acceptance, if you want confusion alleviated, then call the strategy something that makes sense. Jerry Parker, an original Turtle who runs a trend following managed futures firm, has said it well:

“I think another mistake we made was defining ourselves as managed futures, where we immediately limit our universe. Is our expertise in that, or is our expertise in systematic trend following, or model development. So maybe we trend follow with Chinese porcelain. Maybe we trend follow with gold and silver, or stock futures, or whatever the client needs. It’s called managed futures because that was the profit center at the FCMs. We’re trading these great systems, and testing, and making sure what we do has worked in the past. And being disciplined, and unemotional, and applying our methods to the futures markets. But limiting our trading to this one group of markets. We need to look at the investment world globally and communicate our expertise of systematic trading. You have Big Blue beating the world chess champion, and everybody saying yeah, that makes sense, I can understand that. We’ve not been able to maximize our opportunities with systematic trading. People look at systematic and computerized trading with too much skepticism. But a day will come when people will see that systematic trend following is one of the best ways to limit risk, and create a portfolio that has some reasonable expectation of making money. We’ve got to be there and ready to take advantage of the opportunity. I think we’ve mis-communicated to our clients what our expertise really is. Systematic trading is going to be better for everyone in the long run. Our methods will work on lots of different markets. The ones that are hot today, the ones that are not hot today. We don’t want to pigeon-hole ourselves as managed futures or commodities.”

Excerpts: Managed Account Reports

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