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Tag: Trend Following

Herd Behavior: Excerpt from Trend Following, 5th Edition

Posted on by Michael Covel

An excerpt from my most recent edition of Trend Following:

Trend following is as much about observing and understanding human behavior as it is about moving averages, breakouts, and position sizing. Understanding human behavior and how it relates with markets is commonly referred to as behavioral economics or behavioral finance. It evolved from the contradiction between classical economic theory (EMT) and reality. The assumption people act rationally, have identical values and access to information, and use rational decision making is one preposterous assumption.

However, trend following strategies only work if price trends continue. But why should trends continue? If prices initially under-react to either good or bad news, trends tend to continue as prices slowly move to fully reflect changes in fundamental value. These trends have the potential to continue even further as investors herd (or chase trends). Herding can cause prices to overreact and move beyond fundamental value after the initial under-reaction. Naturally, all trends must eventually end, as deviation from fair value cannot continue infinitely. Said another way, people are irrational as hell and seldom make rational decisions even if they think they do. That’s not my one-man opinion either. I have had the good fortune to learn from and interview the top minds in the field of behavioral economics and finance, including Nobel Prize winners Daniel Kahneman and Vernon Smith, Dan Ariely, Colin Camerer, Christopher Chabris, Robert Cialdini, K. Anders Ericsson, Gerd Gigerenzer, Donald MacKenzie, Spyros Makridakis, Terrance Odean, Steven Pinker, Laurie Santos, Hersh Shefrin, Daniel Simons, Paul Slovic, Didier Sornette, Meir Statman, Brett Steenbarger, and Philip Tetlock to name a few of the best minds in the field. (You can find these interviews on my podcast at www.trendfollowing.com/behavior.)

Some want to argue about everything but this. Big mistake.

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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.

“I can’t explain the experience in words…”

Posted on by Michael Covel

Feedback in:

I already read your book… and I can’t explain the experience in words. Now I’m thinking in terms of go with the flow in each and every aspect of life. Means trend following works in everyday life. I definitely want to meet you once in a lifetime. Thank you Michael.

Thanks, but I am not that special!

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
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• 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.

“I am writing to you to say, YES! Someone can be taught from zero experience…”

Posted on by Michael Covel

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Hi Michael,

I came across your work around 3-4 months ago, I don’t remember how but I’m glad I did. I’ve gone back and listened to many of your podcasts and in one of them you spoke about the ability or wondered if someone could be taught to become a Trend Follower with no market experience.

I don’t remember it exactly, however I felt it described me perfectly. For the last 2.5 years I have worked in Foreign Exchange as an Account Manager in Australia. A person who already worked their took me under their wing and has taught me about trading over the past 18 months. He has been a trader for 17 years and trades Currencies, Stocks (Options), Commodities and uses the same strategy regardless of the instrument.

At the time I did not know, however they are a trend follower so from day 1, that’s what I have also been taught…. and when I look at things now I don’t understand why everyone isn’t a trend follower (music to your ears) as it makes 100% complete sense to me.

I guess I am writing to you to say, YES! Someone can be taught from zero experience in the financial markets to become and be taught to be a trend follower. The firs thing my mentor told me to do was read Jesse Livermore’s books which I have done. Over the past 18 months, I have read those books, found new mentors (yourself included) joined Twitter to follow you guys and paper traded for 12 months.

I’m not a rash, spur of the moment guy, and I think that’s why Trend Following appeals to me, I’ve read and listened to many many people considered to be successful traders in this area and really taken my time to understand and learn about the markets and more importantly how to be a successful trader/trend follower.

I just wanted to reach out and say YES, from an absolute novice with no experience you can be taught to be a trend follower, and I think it’s the only way to trade! Your book has been ordered from Amazon (New Version) along with TurtleTrader, Market Wizards and Trading in the Zone to accompany my 3 Livermore books and my wall of mentors:

Jesse Livermore
Michael Brown (work colleague)
Michael Covel
LMT978 – Larry
Stephen Burns
Rayner Teo

A few others, however I’ve come across these guys from your site and interviews (thank you).

I look forward to becoming an extremely successful trader and one day would love to be interviewed for you audience as a very successful trader that no-one had heard of!

[Name]

Thanks for the nice words!

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.

Trend Following, 5th Edition: How to Make a Fortune in Bull, Bear and Black Swan Markets (Wiley Trading)

Posted on by Michael Covel
New Trend Following
New Trend Following

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.

“The trend… can be a friend, but you have to choose your friends wisely!”

Posted on by Michael Covel

Feedback in:

Hello Michael,

Thank you for all the work you have done. I truely appreciate your books. I suppose I have always been a closet Trendi… but strongly influenced by technicals such as head and shoulders, double tops etc. Unfortunately I could rarely operate in name as a Trendi!

Why?

I was an international fund manager for 21 years and handled up to $10 billion dollars in one Fund I worked for 3 major pension funds… sold out $10 billion of stock in 6 international markets in 1987… 2 weeks before the crash and had a 47% return that year… Why? Because the US market had a clear double top and it was a market which just about played every extreme. Later in 1992 I went into stockbroking. Now again a closet Trendi… Why in my two careers was I a closet Trendi?

A) In Fund management … big reports of bullshit figures for a boards consumption (yes, they still want and believe in it) and you give them what they truly believe!!!! And in Stock Broking… you speak the numbers… and then of course better and better numbers in other shares. Numbers to generate movement and commission. You are keeping the ball in the air. Hard to be a Trendi but under “other reasons” clients got taken out at the end of a positive trend. Sometimes only on strong persuasion were they persuaded to go… but good things stay good too long and every client can’t sell. Well 99% can’t sell and they loose unless the broker berates them. I have heard a million reasons why clients don’t want to sell and they are all greed or plainly a form of “hypnotic trance.” Like a kangaroo in a cars head lights they get paralyzed and can’t run!!! So I call this inability to sell “The Kangaroo Effect” “It’s the smart Trendi’s winning edge”… he’s out and the crowd continue and continue to be mesmerized by the light! So today I run my own money and for the record I am a total Trendi.

I have learned a lot from Gann and many other writers on “the trend”. Yes I have started reading all your books to gain a greater and greater insight… all good stuff… they are piled up beside me. And I enjoyed your movie, especially the winning strategy of successful poker players. A great insight and just the movement of the sheep, crowd Psychology, it was a terrific movie. Can you suggest any more good books to read?

I have my own system and so far so good, but if I can get a better stop out process and entry process then I will adopt it … so I keep reading and I keep learning to improve my game. I don’t know whether I am a natural, time will tell. But in two years I have turned $50,000 into $1.7 million. Many questions in my mind remain unanswered.

Why did the smartest Trendi, Jessie Livermore, loose it after getting it so right? How much of a Trendi was Bernie Baruch? Is Warren Buffett really a closet Trendi?

Why do so many Fund Managers average down but rarely average up and why do so few fund managers ever cut their loosing positions (my own belief is the ego is too big to admit a mistake)? Yes it’s always just a bad market! Much easier to sell a bad market to the directors rather than admit a mistake and get kicked out pronto… After all, directors can only do one thing with people who make consistent mistakes… even if they are very good and consistently out perform the index!!! It’s like Eric Barker says in “Barking up the wrong tree”. Good people who follow the systems that prevail are trusted even though the Philosophy is wrong. So smart people know they can only operate the correct philosophy to win under disguise!!! Could successful people all be outliers, just closeting themselves and appearing to be true company men? I know I did it because people love stories and any story can be designed to fit success! I am glad I finally can do it all my way and can stick to my knitting… The trend in the end, can be a friend, but you have to choose your friends wisely!

Your strong supporter.
[Name]

Thanks!

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.

“I want to go down this rabbit hole…”

Posted on by Michael Covel

Feedback in:

Great podcast with Denise Shull! Reminded me to continue reading Market Mind Games that I had begun a year or so ago! Wonderful material and you hit on key issue of whether it is technique that needs honing vs going deeper into ones psyche and naming all the intricate feelings that are part of recurring patterns that manifest in trading decisions… I want to go down this rabbit hole but not sure how best to do it… I am sure Denise charges a lot for her consulting and coaching but will start with the book. Hope you are well!

[Name]

Thanks!

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.

“Next time I will come with my ‘A’ game…”

Posted on by Michael Covel

Feedback in:

I have only listened to about 80 of your podcasts. So I am about 2 months into my trend following journey. I mostly trade stocks and have for some time. I am from the O’Neil school of trading. So when I first started trading I was mostly fundamental and some technical. But as I have advanced, I see the technical side or the trend following side as more my style. I am just about to read your new book. So If I am not using the terms trend following and systematic properly it is only that I am pretty new to your podcasts.

And again, I can’t tell you how much I appreciate your podcasts. They do mean a lot to me. I feel like most TV, Radio, Movies (except yours), kill your brain cells and make you dumber when you are done. I find your podcast to be compelling and very informative. It is the complete opposite of other forms of media. Where I really commend you is that you are a great interviewer. Personally I would say you are one of the top 5 interviewers. In fact I believe you surpass anyone in the financial media by a wide margin. And I will give you an exact example. CNBC gets 3 hours with Warren Buffet. They ask him about politics and the fed. It makes me cringe. The guy is an investor and business man! UGH. I know you would never do that. You bring out the best in your guests and being in your audience it is appreciated.

I will continue to recommend your podcasts to everyone I know. I hope they enjoy it as much as I do.

Again I appreciate your time
[Name]

Thanks!

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.