Covel, Trend Commandments

It’s time for a beach book, and Michael W. Covel’s Trend Commandments: Trading for Exceptional Returns (FT Press, 2011) fits the bill perfectly. The many, many “chapters” are bite-sized, and there are mighty few intellectual challenges to get in the reader’s way as he turns pages faster and faster. The thesis is familiar: trend following is the surest path to trading success. Very little how-to, lots of passion about trading and living an engaged, courageous life. And spiced up with swipes at the likes of Warren Buffett. As I said, a beach book—and therefore one that is difficult to review in a meaningful way.

So, instead, let me pull out three passages, not all Covel’s original ideas, that I think are worth quoting in part.

First, footnoted to Ed Seykota’s website but in Covel’s prose: “All trends are historical. None are in the present. There is no way to determine a current trend, or even define what current trend might mean. You can only determine historical trends. … [T]he only way to measure a now trend, one entirely in the moment of now, would be to take two points, both in the now and compute their difference.” (p. 39)

Second, on figuring out when to get out of a trade, compliments of Peter Borish: “You need a prenuptial agreement with the market.” (p. 75)

Finally, from the “chapter” on statistical thinking, “Trend following is about non-normality of market returns. You will never have, nor will you ever produce, returns that exhibit a normal distribution. You will never produce the mythologically consistent returns that many believe to exist. … Trend following’s alpha comes from letting winners run on the right-hand side of a fat tail and cutting losses short on the left-hand side. Eliminating losing positions and holding onto profitable positions puts you in the big game hunt for positive outliers. A normal distribution is simply worse than useless as a risk management tool.” (p. 137)