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Summer Reading by Covel – Take II: The Little Book of Trading

August 29th, 2011 · 5 Comments · Books

Little Book of Trading

Trend Following Strategy for Big Winnings is the subtitle of Michael Covel’s latest book (link on Amazon), an addition to the “Little Book of…” series (“Trading” in this instance).

I find it quite surprising for an author to come out with two books roughly at the same time but this book is fairly different from the recent Trend Commandments.

Similarly, this is an easy, short read – good for one sitting on the beach or by the pool, as the cliche has it.
And once again, one should not expect an actual specific strategy per se, in the form of a ready-to-be-traded system, delivered in the book – for this, a better place would probably be the Trading Blox forums or even this humble blog (start with the State of Trend Following report, which uses and points to several basic Trend Following systems provided by Trading Blox). Unless you prefer to purchase the author’s course…

No, this book is mostly about inspiration from successful (Trend Following) stories. Whereas Trend Commandments is all about “principles over personalities”, this latest Covel instalment revolves around some famous Trend Following personalities. And successful stories are one of the best ways to get inspiration and motivation, in my opinion. I actually felt this was one aspect missing from Trend Commandments, especially compared with the original Trend Following book (which contains a variety of philosophy, trading aspects, successful stories, performance charts, trader insights, etc.).

It seems that Covel decided to split out several concepts in two different books). In this Little Book, each of the twelve chapters cover Trend Following personalities, with their story and insights on trend trading.

Below are the personalities/firms covered (a large share of them being part of the Trend Following Wizards report) with chosen quote(s) from each chapter.

Sunrise Capital (Gary Davis, Jack Forrest, Rick Slaughter)

Trend Following can be simple, but sticking with it is the hard part.

Make sure you never miss a potential big trend. You always want to put some kind of trade when your system says enter as your price trigger hits. If you are wrong, you have stops to protect your capital, to protect your downside. After all, you never know which move is going to be the mother of all moves.

David Druz

Trend traders are trying to capture risk premium from the hedgers. […]
Hedgers hope to minimize their exposure to unwanted risk. Speculators (i.e. trend followers assume risk for hedgers. […]
Hedgers are net losers in futures markets over the long run, and Druz’s trend trading approach is based on capturing this risk premium.

The more robust a system, the more volatile it tends to be!
There are whole families of trend trading ideas that seem to work forever on any market. The down side is they are very volatile because they are not curve-fit

Paul Mulvaney

How you compute the amount you are willing to risk for every trade, and how you exit your big winners, that’s what counts.

Mulvaney’s trend trading is profitable on 54 to 55 percent of days, but only on 25 percent of trades. Obviously those 25 percent of trades are more profitable than the 75 percent of trades that are losers.

Kevin Bruce

There is great truth in the idea that if you take care of the downside, the upside will take care of itself.

Larry Hite

Hite has two basic rules about trading and life:
1) If you don’t bet, you can’t win.
2) If you lose all your chips, you can’t bet

David Harding

Don’t get caught up constantly trying to lower your risks. Think of yourself as running a risk targeting business where you go find risk. No risk, no reward!

I think the efficient market hypothesis is quite useful too. One prediction it makes is that it is difficult to beat the markets. It’s just saying that the markets know better than you do. So the assumption that the markets know better than you do is quite a sensible and useful assumption. It certainly would lead you to approach [beating the markets] with humility and modesty.

Determination is the same as having wings. If at first you don’t succeed, try, try, and try again. Madonna always says, ‘I’m like a cockroach.’

Bernard Drury

I made the decision that I would give up the use of my experience as a sector specialist in favour of adopting a systematic approach in which the most important benefits are the application of very extensive research, consistency of method, and diversification. For example, if we are curious about a trading rule, we run a simulation across a portfolio of about 70 instruments and 15 years of data. If we run a simulation on three or four systems together, then we get an even more robust result. This type of research provides some benefits that are difficult for a discretionary or fundamental trader to have.

Justin Vandergrift

While entry and exit is an overwhelming focus for new traders, it is only a small part of the recipe for winning in the trend follower’s cookbook. Money management is far more imperative to your success than worrying about a perfect entry.

Vandergrift, like many of the trend following traders, found through intense research that the only systems that really worked over time were long term trend following in nature. However, his real Aha! moment came when he put money management into his trading system equation. […] If you have a portfolio of markets, […] you want t risk an equal amount on every trade.

Eric Crittenden and Cole Wilcox

Wilcox, for example, has a constant process of asking, “Am I wrong?” while he sees everyone else asking, “Am I right?” If you don’t ask the correct probing question with genuine curiosity, like a scientist, you cannot arrive at the correct answer.
The scientific method doesn’t allow you to prove anything. All you can do is disprove theories, and then, with a preponderance of evidence still left, you can accept and keep the remainder as long as you can’t disprove it.

A few key lessons from Basso helped Crittendedn and Wilcox from the beginning. Basso was blunt, “It really is simple. You hold your winners, have discipline and cut your losers. You take what the market gives and you’ll be successful in this business”. Crittenden added: “One. Don’t over-bet. Two. Diversify across markets.”

Michael Clarke

You want to look for trend following models that remain robust over long time periods and you want to include models that have flat to negative performance for periods of up to two years. The principles that allow a good model to work successfully may fall out of favour and stop working for a period of time, but if the model has validity, the long-term principles will reassert themselves over time. Don’t jump the gun in throwing away your models.

In order for a model to be accepted, you want it to trade all markets using the same rules and parameters. Your results should yield good performance across 90-plus percent of all markets tested. Also, no model should be accepted unless it shows stability of performance during tests involved with shifting parameters and altering rules. This is the definition of robust.

Charles Faulkner

Stay in the moment of right Now.

The idea of cutting your losses quickly and letting your gains run is in fact going against human biology.

Successful trend following trading is about developing a belief deep in your belly that you are part of a larger system.

Ed Seykota

The Whipsaw song:

  • Ride your Winners
  • Cut your Losses
  • Manage your Risk
  • Use Stops
  • Stick to the System
  • File the News

Interesting and an easy read, a good book to round off the Summer…

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5 Comments so far ↓

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    […] Some end of summer reading: The Little Book of Trading by Michael Covel.  (Au.Tra.Sy Blog) […]

  • Fred

    I’m not a fan of Trend Commandments but this book was written more in the style “Trend Following” and is, in my opinion, a far more interesting read. Covel gets his share of criticism for not providing specific trading rules but I don’t have an issue with that. Anyone that is practicing trend trading will pick up on the occasional tidbit of very useful advice from the seasoned traders.

  • Jez Liberty

    Agree Fred – I found it more inspirational too – similarly to Trend Following, which still stays my favourite. But this one is a nice addition with stories of additional traders.

  • Michael Covel

    Inside baseball? It just worked out that two different books were done at the same time. The plan was not to split one book into two. From the start it was a plan to achieve to different goals with different content.

  • Jez Liberty

    Hi Mike – nice of you to drop by..
    “Inside baseball”.. I had to google that one! (not really a UK idiom – but coming from you, a baseball metaphor is not so surprising ;-)
    True – and I can definitely see the point of the two separate books – and I can understand their respective goals. I was just a bit surprised by the near-simultaneous timing of both releases. But what do I know?.. I have no experience in book publishing/marketing and I’m sure the strategy has its merits.

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