Trend Following by Michael Covel is the bible for traders interested in learning how trend trading works as a method. This book explains the principles and concepts that you will need to understand for how the best trend following traders made their outsized returns on capital. It will teach you the key principles that the most successful money managers use to profit from trending markets through systematically trading managed futures.
After personally reading several hundred trading and investing books over the past 30 years I must say this book ranks easily in the top 5 titles in my opinion. It is a thorough book and covers every area a trend follower will need: risk management, psychology, creating systems, the nature of trends, asymmetric trading, and the huge difference in using reactive technical analysis versus predictive technical analysis. This newest edition is much larger than past editions of this book and the new added content just makes it even more valuable.
Instead of being influenced by the media and mutual fund propaganda author Michael Covel cuts through all the pundits opinions about the market and presents how the most successful money managers and traders make huge cumulative returns over long periods of time.
How do trend followers trade diversified markets and consistently grow capital? They use proven systems that identify and follow trends.They create systems that give them entry and exit signals along with risk management parameters for position sizing based on volatility. They are not experts on the fundamentals of any market, but their technical systems capture the price trends in markets. They cut their losing trades short but let their winning trades run as long as possible.
They exit losses unemotionally when their stop loss is triggered and they exit winning trades when their trailing stops signals the trend could be coming to an end. They attempt to capture a big part of a trend, not buying at the low or selling at the high, but waiting for the market to tell them to get in and then when to get out.
Readers want proof that trend following trading works? You will see quantitative data in this book showing the returns of many trend followers. The interviews, quotes, and return data Covel shares of many trading legends are very valuable for trading education. How powerful are these principles? John W. Henry bought the Boston Red Sox with his profits from managing his trend following fund. The book documents records from year after year of successful trading by many trend following funds.
Trend followers do not try to predict the future, they follow the trend in price action and the direction of momentum. Trend Followers go both long and short based on their systems with no bias to bullishness or bearishness. While they may at times have drawdowns in the short term they eventually have big returns on capital in the long term.
They almost always find themselves positioned correctly during big events, bubbles, crashes, and panics because the market was already giving directional signals through price action with the herd behavior showing fear or greed. This edition expands on how the trend followers made huge returns during October of 2008 because they were already short due to the trend at the beginning of the month. Trend followers made major returns in the financial panic of 2008-2009 while the vast majority of investors lost a lot of money. This book will take you inside the minds of some of the world’s greatest trend traders.
Many years ago an earlier edition of this book really helped me solidify my trading systems and plans and understand how to make money from trends alone. I give this book and Michael Covel the most credit for teaching me in advance how to think like a quantitative trader and not an investor during the carnage of the financial panic. Covel’s books saved me from large losses by changing my perspective from predictions and opinions to trend following in my personal accounts.
This newest edition adds enough new content that makes another read through of this classic well worth it. This was the third time reading this book for me. The trading principles in this book can help traders of many different methods and timeframes improve their chances of profitability and the size of their profits. The book Trend Following by Michael Covel could be the best money you spend on trading education, it was for me 15 years ago.