Details

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

<p><b>Michael W. Covel</b> searches. He <i>digs</i>. He goes behind the curtain to reveal a state of mind the system doesn't want you in.<br />Michael teaches beginners to seasoned pros how to generate profits with straightforward and repeatable rules. He is best known for popularizing the counterintuitive and controversial trading strategy, trend following. His perspectives have garnered international acclaim and have earned him invitations with a host of organizations: China Asset Management, GIC Private Limited (Singapore), BM&F Bovespa, the Managed Funds Association, Bank of China Investment Management, the Market Technicians Association, and multiple hedge funds and mutual funds. He also has the distinction of having interviewed five Nobel Prize winners, including Daniel Kahneman and Harry Markowitz, on his <i>Trend Following</i> podcast—which now exceeds 500 episodes and 5 million listens.<br />Michael's consulting clients include individual traders, hedge funds, sovereign wealth funds, and institutional investors in more than 70 countries. He splits his time between the United States and Asia.<br /><b><a href="http://www.trendfollowing.com/">www.trendfollowing.com</a></b></p>

<p><b>"Michael Covel's Trend Following: Essential."</b><br /> <b>—Ed Seykota,</b> profiled in <i>Market Wizards</i></p> <p>"Covel's <i>Trend Following</i> is the must-read for all investors. Why? Because every investor needs a <i>trend</i> to make money, and when the trend shifts investors need to <i>follow</i> it. Read it."<br /> <b>—Wesley R. Gray,</b> <b>PhD,</b> CEO, Alpha Architect, and author of <i>Quantitative Momentum</i></p> <p>"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."<br /> <b>—Dr. Alexander Elder,</b> Author, <i>The New Trading for a Living</i></p> <p>"Covel's <i>Trend Following</i> 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."<br /> <b>—Cullen Roche,</b> Founder, Orcam Financial Group, LLC</p> <p>"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 <i>Trend Following</i> 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."<br /> <b>—John Bollinger,</b> Founder, www.BollingerBands.com</p> <p>"While financial television obsessively tracks every tick in the stock market, Michael Covel's <i>Trend Following</i> continues to draw attention to a strategy, diversified trend following, that generates unique returns for disciplined investors with a long-run time horizon."<br /> <b>—Tadas Viskanta,</b> Founder and Editor, Abnormal Returns; Author, <i>Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere</i></p>

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