Trend Following

"Michael Covel's Trend Following: Essential."
-Ed Seykota, profiled in Market Wizards
"Covel's Trend Following is the must-read for all investors. Why? Because every investor needs a trend to make money, and when the trend shifts investors need to follow it. Read it."
-Wesley R. Gray, PhD, CEO, Alpha Architect, and author of Quantitative Momentum
"While enjoying this book, be sure to look up another resource from Covel-his remarkable podcast. Michael has a gift for interviewing, and it is fun and educational to follow him into the offices of many serious traders."
-Dr. Alexander Elder, Author, The New Trading for a Living
"Covel's Trend Following has become an investment classic and a must read for anyone who wants to better understand how to profit from the financial markets using systematic and unbiased approaches."
-Cullen Roche, Founder, Orcam Financial Group, LLC
"Trend following: If it is going up, buy it. If it is going down, sell it. How could something seemingly so simple be so controversial? The answer lies in the definitions: What does going up mean? Going down? What's a trend? What's a turn? These questions have a wide variety of answers, largely dependent on the goals and risk/reward preferences of the answerer. In Trend Following Mr. Covel covers the waterfront. You'll find many definitions of trend following here, each with its advocates. You will be able to compare and contrast approaches and perhaps find one that suits you. At the very least, after reading this book you'll have the territory mapped and understand what trend following has to offer."
-John Bollinger, Founder, www. BollingerBands. com
"While financial television obsessively tracks every tick in the stock market, Michael Covel's Trend Following continues to draw attention to a strategy, diversified trend following, that generates unique returns for disciplined investors with a long-run time horizon."
-Tadas Viskanta, Founder and Editor, Abnormal Returns; Author, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere

Foreword by Barry L. Ritholtz xv
Preface xix
Section I Trend Following Principles 1
1 Trend Following 3
Speculation 3
Winning versus Losing 9
Investor versus Trader 10
Fundamental versus Technical 11
Discretionary versus Systematic 15
Hiding in Plain Sight 17
Change Is Life 19
Follow the Trend to the End When It Bends 22
Surf the Waves 26
2 Great Trend Followers 31
David Harding 33
Bill Dunn 37
John W. Henry 49
Ed Seykota 62
Keith Campbell 69
Jerry Parker 74
Salem Abraham 75
Richard Dennis 77
Richard Donchian 83
Jesse Livermore and Dickson Watts 87
3 Performance Proof 91
Absolute Returns 92
Volatility versus Risk 93
Drawdowns 99
Correlation 104
Zero Sum 106
George Soros 108
Berkshire Hathaway 111
4 Big Events, Crashes, and Panics 117
Event 1: Great Recession 119
Event 2: Dot-com Bubble 132
Event 3: Long-Term Capital Management 145
Event 4: Asian Contagion 157
Event 5: Barings Bank 161
Event 6: Metallgesellschaft 164
Event 7: Black Monday 167
5 Thinking Outside the Box 177
Baseball 178
Billy Beane 180
Bill James 181
Stats Take Over 183
6 Human Behavior 189
Prospect Theory 190
Emotional Intelligence 195
Neuro-Linguistic Programming 197
Trading Tribe 197
Curiosity, Not PhDs 199
Commitment 201
7 Decision Making 205
Occam's Razor 206
Fast and Frugal Decision Making 207
Innovator's Dilemma 210
Process versus Outcome versus Gut 211
8 The Scientific Method 215
Critical Thinking 216
Linear versus Nonlinear 217
Compounding 222
9 Holy Grails 225
Buy and Hope 228
Warren Buffett 229
Losers Average Losers 231
Avoiding Stupidity 236
10 Trading Systems 247
Risk, Reward, and Uncertainty 248
Five Questions 252
Your Trading System 263
Frequently Asked Questions 264
11 The Game 273
Acceptance 274
Don't Blame Me 276
Decrease Leverage, Decrease Return 277
Fortune Favors the Bold 278
Section II Trend Following Interviews 281
12 Ed Seykota 283
13 Martin Lueck 295
14 Jean-Philippe Bouchaud 311
15 Ewan Kirk 319
16 Alex Greyserman 335
17 Campbell Harvey 353
18 Lasse Heje Pedersen 367
Section III Trend Following Research 381
19 A Multicentennial View of Trend Following 383
The Tale of Trend Following: A Historical Study 385
Return Characteristics over the Centuries 388
Risk Characteristics over the Centuries 398
Portfolio Benefits over the Centuries 400
20 Two Centuries of Trend Following 405
Trend Following on Futures since 1960 408
Extending the Time Series: A Case-by-Case Approach 412
Trend over Two Centuries 417
21 Trend Following 425
Introduction to Different Trend Following Models 425
Diversification between Different Trend Following Models 427
Aspect's Approach to Trend Following 429
Aspect's Model Compared to Other Trend Following Models 431
22 Evaluating Trading Strategies 435
Testing in Other Fields of Science 435
Revaluating the Candidate Strategy 437
Two Views of Multiple Testing 440
False Discoveries and Missed Discoveries 442
Haircutting Sharpe Ratios 444
An Example with Standard and Poor's Capital IQ 445
In Sample and Out of Sample 446
Trading Strategies and Financial Products 447
23 Black Box Trend Following-Lifting the Veil 451
The Strategies 452
Performance Results and Graphs 456
Sector Performance 458
Performance of Long versus Short Trades 461
Stability of Parameters 463
Are CTAs a Diversifier or a Hedge to the SP500? 466
24 Risk Management 471
Risk 471
Risk Management 471
Optimal Betting 473
Hunches and Systems 473
Simulations 474
Pyramiding and Martingale 474
Optimizing-Using Simulation 475
Optimizing-Using Calculus 477
Optimizing-Using the Kelly Formula 478
Some Graphic Relationships Between Luck, Payoff, and Optimal Bet Fraction 479
Nonbalanced Distributions and High Payoffs 479
Almost-Certain-Death Strategies 480
Diversification 482
The Uncle Point 482
Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing 483
Stress Testing 484
Portfolio Selection 485
Position Sizing 485
Psychological Considerations 486
25 How to GRAB a Bargain Trading Futures . . . Maybe 489
How to GRAB a Bargain Trading Futures 490
Following Trends Is Hard Work 490
Figuring Out How the Pros Do It 491
A Computer Model of the Pros 492
A Terrible Discovery 493
Solving the Mystery-Why Does the GRAB System Lose? 494
Often It Is Out of Sync with the Market 494
Worse Still, It Misses the Best Moves! 495
Maybe Being Profitable Means Being Uncomfortable? 496
GRAB Trading System Details 496
Buys on Break of Support, Sells on Break of Resistance 496
Testing Reveals Some Behavior I Do Not Expect 498
Difference between Parameter Values Defines Character of GRAB System 498
GRAB Trading System Code 500
26 Why Tactical Macro Investing Still Makes Sense 503
Managed Futures 504
Defining Managed Futures and CTAs 507
Where Institutional Investors Position Managed Futures and CTAs 507
Skewness and Kurtosis 507
Data 509
Basic Statistics 510
Stocks, Bonds, Plus Hedge Funds or Managed Futures 511
Hedge Funds Plus Managed Futures 512
Stocks, Bonds, Hedge Funds, and Managed Futures 513
27 Carry and Trend in Lots of Places 533
Carry and Trend: Definitions, Data, and Empirical Study 536
Carry and Trend in Interest Rate Futures 539
Trend and Carry across Asset Classes 541
Carry and Trend across Rate Regimes 545
28 The Great Hypocrisy 549
Epilogue 569
Afterword by Larry Hite 575
Trend Following Podcast Episodes 579
Endnotes 583
Bibliography 621
Acknowledgments 635
About the Author 639
Index 641