Trend Following: Learn to Make Millions in Up or Down Markets by Michael W. Covel

From the Publisher

“Michael Covel’s Trend Following: Essential.”

—Ed Seykota, trend follower for 35 years and original Market Wizard

“A mandatory reference for anyone serious about alternative investments.”

—Jon Sundt, president and CEO, Altergris

“Michael Covel does an excellent job of educating his readers about the little-known opportunities available to them through one of the proven best hedge fund strategies. This book is like gold to any smart investor.”

—Christian Baha, founder and owner, Superfund

“Covel has created a very rare thing—a well documented and thoroughly researched book on trend following that is also well written and easy to read. This is one book that traders at all levels will find of real value.”

—John Mauldin, Thoughts from the Frontline

The Investment Strategy That Keeps on Making Money While Everyone Else Is Losing It:
How Trend Followers Made a Fortune During the 2008 Stock Market Crash

Did your buy and hold investments survive the crash of 2008? While many were getting hammered, trend followers were earning profits ranging all the way up to +40% for the month of October 2008 alone!

Now, the #1 guide to trend following has been thoroughly updated to reflect 2008’s cataclysmic events. Michael W. Covel reveals exactly how the trend followers achieved those amazing results. Using simple, up-to-the-minute charts from top traders, he doesn’t just prove this strategy works: Heshows why only a technical system based on following price trends can win over the long term.

Best of all, he shows you exactly how to apply the same strategies in your own portfolio—so you, too, can keep on profiting no matter what happens next!

For more than 30 years, trend following has been the one trading strategy that’s consistently delivered extraordinary profits in bull and bear markets. While most investors were losing a fortune in the 2008 stock market collapse, stuck in buy and hold investments, trend followers were earning huge profits...up to a whopping +40% in the single month of October 2008! The proof’s in this book: brand-new data you can view for yourself, plus all the information you need to know to utilize the same timeless strategies in your portfolio.

In this fully updated edition, trend following expert Michael Covel introduces the traders and fund managers who’ve been using this strategy for decades, adding brand-new profiles such as David Harding, who manages $10 billion plus dollars through his London-based trend following firm. Then, Covel walks you through all the concepts and techniques you need to use trend following yourself. One step at a time, one simple chart at a time, you’ll learn how to understand price movements well enough to profit from them consistently—in any market.

Today, you need trend following more than ever. Read this book, and put it to work for you!

• Real proof, real data, real results
  Includes over a decade of detailed performance charts, updated to include the Fall 2008 market crash

• All the Information You Need...in One Number
  Why the market price still tells you all you need to know to trade—and always will—in both bull and bear markets

• Pinpointing Targets of Opportunity
  What to trade, when to trade, and how much to trade

• Meet Today's Leading Trend Followers
  Extraordinary trader profiles, from David Harding to John W. Henry to Ed Seykota

Product Details

• Table of Contents
• Forewords & Introductions

Table of Contents

Forewords & Introductions

Praise for Trend FollowingPraise for Trend Following

“Michael Covel’s Trend Following: essential.”

—Ed Seykota, trend follower and original market wizard

“Trend Following by Michael Covel? I’m ‘long’ this book.”

—Bob Spear, developer of Trading Recipes Software

“Michael Covel’s Trend Following is a breakthrough book that captures the essence of what really makes markets tick. Diligently researched and comprehensive in scope, it will replace The Market Wizards as the must-read bible for a new generation of traders.”

—Jonathan Hoenig, portfolio manager, Capitalistpig Hedge
Fund LLC and Fox News contributor

“Investment books that have a lasting appeal offer insight that resonates with a large number of investors. We believe Michael Covel’s Trend Following will be such a book.”

—Richard E. Cripps, Legg Mason chief market strategist

“Please read Trend Following whether you think you have an interest in trend following or are not sure...Covel has hit a home run with it.”

—Gail Osten, editor-in-chief, Stocks,
Futures, & Options magazine

“Michael Covel has written the definitive book on trend following. With careful research and clear insight, he has captured the essence of the most successful of all trading strategies. Michael knows his subject matter and he writes about it with passion, conviction, and enthusiasm. This enjoyable and well written book is destined to become a classic.”

—Charles LeBeau, author ofTechnical Traders Guide to
Computer Analysis of the Futures Markets

“Trend Following is an engrossing and educational journey through the principles, pitfalls, players, and psychology of aggressive technical trading of the investment markets. It is rich in its wisdom and historical study.”

—Gerald Appel, president of Signalert Corporation and publisher
of Systems and Forecasts newsletter

“Conventional wisdom says buy low and sell high, but what do you do now that your favorite market—be it a stock, bond, or commodity—is at an all-time high or low? For a completely different perspective, from people who actually make money at this business, take a look inside. Michael Covel has written a timely and entertaining account of trend following—how it works, how to do it, and who can do it. While it’s not for everybody, it might be for you.”

—Charles Faulkner, NLP modeler and trading coach, featured in
numerous books including The New Market Wizards

“I think the book did a superb job of covering the philosophy and thinking behind trend following (basically, why it works). You might call it the Market Wizards of Trend Following.”

—Van K. Tharp, Ph.D., president, International Institute of Trading Mastery, Inc.
Van was originally profiled in The Market Wizards by Jack Schwager.

“I think that this book documents a great deal of what has made trend following managers a successful part of the money management landscape (how they manage risk and investment psychology). It serves as a strong educational justification on why investors should consider using trend following managers as a part of an overall portfolio strategy.”

—Tom Basso, retired CEO, Trendstat Capital Management, Inc. Tom was
originally profiled in The New Market Wizards by Jack Schwager.

“Michael Covel mixes a unique blend of trend following matters with the thoughts and quotes of successful traders, investors and society’s leaders. This is a valuable contribution and some of the best writing on trend following I’ve seen.”

—Robert (Bucky) Isaacson, managed money and trend
following pioneer for more than 30 years

“Trend Following: Definitely required reading for the aspiring trader.”

—David S. Druz, tactical investment management and trend follower for 25 years

“Michael Covel reveals the real secret about trading—that there is no secret. His points are peppered with wisdom from experts across the industry.”

—John Ehlers, president, MESA Software

“Men wanted for hazardous journey. Small wages. Bitter cold. Long months of complete darkness. Constant danger. Safe return doubtful. Honor and recognition in case of success.”¹

This book is the result of a 14-year “hazardous journey” for the truth about trend following trading. It fills a void in a marketplace inundated with books about buying low and selling high, index investing, and all other types of fundamental analysis, but lacking any resource or, for that matter, practically any reference to what I believe is the single best strategy to consistently make money in the markets. That strategy is known as trend following. Author Van Tharp has described it succinctly:

“Let’s break down the term ‘trend following’ into its components. The first part is ‘trend.’ Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices ... ‘following’ is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then ‘follow’ it.”²

When it is a question of money, everyone is of the same religion.

Voltaire

Trend following trading seeks to capture the majority of a market trend, up or down, for profit. It aims for profits in all major asset classes—stocks, bonds, currencies, and commodities. Unfortunately, however simple the basic concepts about trend following are, they have been widely misunderstood by the public. My desire to correct this state of affairs is what, in part, launched my research. I wanted to be as objective as possible, so I based my writing on all available data:

• Trend followers’ month-by-month performance histories
• Trend followers’ published words and comments over the last 30 years
• News accounts of financial disasters
• News accounts of the losers in those financial disasters
• Charts of markets traded by trend followers
• Charts of markets traded by losers in the financial disasters

If I could have written a book comprising only numbers, charts, and graphs of trend following performance data, I would have. However, without any explanation, few readers would have appreciated the ramifications of what the data alone showed. Therefore, my approach to writing Trend Following became similar to the one Jim Collins describes in his book Good to Great, in which a team of researchers generated questions, accumulated data in their open-ended search for answers, and then energetically debated it.

Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. The schools are not nurseries of progress and improvement, but conservatories of tradition and unvarying modes of thought.

Ludwig von Mises

However, unlike Collins who was writing about generally well known public companies, trend followers form a sort of underground network of relatively unknown traders who, except for an occasional article, the mainstream press has virtually ignored. What I have attempted to do is lift the veil, for the first time, on who these enormously successful traders are, how they trade, and what is to be learned from their approach to trading that we might all apply to our own portfolios.

Trend Following challenges much of the conventional wisdom about successful trading and traders. To avoid the influences of conventional wisdom, I was determined to avoid being influenced by institutionalized knowledge defined by Wall Street and was adamant about fighting “flat earth” thinking. During my research, starting with an assumption and then finding data to support it was avoided. Instead, questions were asked and then, objectively, doggedly, and slowly, answers were revealed.

If there was one factor that motivated me to work in this manner, it was simple curiosity. The more I uncovered about trend followers, the more I wanted to know. For example, one of the earliest questions (without an answer already) was learning who profited when Barings Bank collapsed. My research unearthed a connection between Barings Bank and trend follower John W. Henry (now the majority owner of the Boston Red Sox). Henry’s track record generated new questions, such as, “How did he discover trend following in the first place?” and “Has his approach changed in any significant way in the past 30 years?”

I was also curious about who won the $1.9 billion hedge fund Long Term Capital Management lost during the summer of 1998. Why did the biggest banks on Wall Street invest $100 billion in an options pricing model with so much inherent risk? Further, considering what mutual fund and hedge fund managers lost during October 2008 and what successful trend followers earned during the same time, I could not understand why so few investors were oblivious to even the existence of trend following trading. Other questions quickly appeared:

• How do trend followers win in the zero-sum game of trading?
• Why has trend following been the most profitable style of trading?
• What is the philosophical framework of trend followers’ success?
• What are the timeless principles of trend following trading?
• What are trend followers’ worldview of market behavior?
• What are the reasons why trend following is enduring?

The important thing in science is not so much to obtain new facts as to discover new ways of thinking about them.

Sir William Bragg

Many of the trend followers studied are reclusive and extremely low key. Some discovered trend following on their own and used it to make their fortunes out of home offices. Bill Dunn, a successful trend follower who has beaten the markets for over 30 years, works out of a quiet, Spartan office in a Florida coastal town. For Wall Street, this approach to trading is tantamount to sacrilege. It goes against all the customs, rituals, trappings, and myths we have grown accustomed to with Wall Street success. In fact, it is my hope that my profiles of trend followers will correct the public’s misconception of a successful trader as a harried, intense workaholic who spends 24/7 in the labyrinth of a Wall Street trading firm, surrounded by monitors and screaming into a phone.

When the first edition of Trend Following hit the streets in April 2004 I hoped to assemble the first comprehensive look at trend following trading. Almost five years since initial publication, that goal was realized. How do I know? Since the first edition of Trend Following, I have met literally dozens of trend following traders managing collectively billions upon billions of dollars. Their feedback has been the validation. I never would have expected that an obscure book put together five years ago would lead me to having conversations with the likes of Nobel Prize winner Harry Markowitz and hedge fund managers Boone Pickens and David Harding, but it did.

Validation aside, October and November 2008 made me want another bite at the apple, another chance to “work” on this book. And lucky for me, the 2008 market chaos gave me that window. There is no doubt that October and November 2008 were the most historic market months since the Great Depression. Most people, most mutual funds, and most hedge funds lost unimaginable sums of money. It has long been said that “genius is leverage in a rising market,” and when the bubble popped in 2008 clearly people who had long been positioned as genius weren’t that smart after all. Already guessed where I am headed with this rant? Yes, while the rest of the world got creamed in 2008, trend followers made fortunes. Performance numbers for top trend following traders for October 2008 alone ranged from +5 percent to +40 percent. Making that much in one month when much of the rest of the world was losing big time is noteworthy to say the least. My publisher Jim Boyd agreed with me.

This new edition of Trend Following includes many new sections and insights, surrounding the same core timeless lessons from the first edition. I updated the book throughout and worked to make material accessible and interesting enough so it might give an occasional “aha” experience. However, if you’re looking for trading “secrets,” you need to look elsewhere. There is no such thing. If you’re in the mood for stories about what it’s like inside a typical Wall Street firm (at least in those firms before they all went under in 2008!) or how greedy traders sow the seeds of their own destruction, your needs will not be met with my writing. But if you are looking for something different, looking for something to fill a void in your understanding of how big returns are actually made year after year, but didn’t know where to turn for honest information, I hope my insights give you the confidence that ultimately helps you to make some big money.

Fish see the bait, but not the hook; men see the profit, but not the peril.

Chinese proverb

To be aware how fruitful the playful mood can be is to be immune to the propaganda of the alienated, which extols resentment as a fuel of achievement.

Eric Hoffer

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