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.
The most important decision anyone makes in any situation is “Where do I put the dividing line between what’s in my head and what’s out there? Where does make-believe leave off and reality begin?” That’s the first job your intellect needs to do before you can act in the real world. If you can’t distinguish reality from make-believe—if you’re at a stoplight and you’re not sure whether the bus that’s coming toward your car is real or only in your head—you’re in big trouble. There aren’t many circumstances where this intellectual distinction isn’t critical.
It was not his intent, but what a great explanation for why trading price is so smart. He continues:
Let’s take what magicians call a force, where the magician gives you a false sense of free action by giving you an extremely controlled choice…When I go to the supermarket, I have a choice of dozens of kinds of cereals—all made by the same manufacturer of essentially the same ingredients. I have the gut impression of variety and freedom, but in the end, the only real choice I have is not to buy.
Mutual funds not really a choice? Left/right politicians not really a choice? Correct, not really a choice.