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Trend Following, 5th Edition

Book Description

Want to take the financial journey to a new investing philosophy that might very well affect the rest of your moneymaking life? No one can guarantee the yellow brick road, but Michael Covel promises the red pill will leave you wide freaking awake.

Trend Following reveals the truth about a trading strategy that makes money in up, down and surprise markets. By applying straightforward and repeatable rules, anyone can learn to make money in the markets whether bull, bear, or black swan—by following the trend to the end when it bends. In this timely reboot of his bestselling classic, Michael Covel dives headfirst into trend following strategy to examine the risks, benefits, people, and systems. You’ll hear from traders who have made millions by following trends, and learn from their successes and mistakes—insights only here. You’ll learn the trend philosophy, and how it has performed in booms, bubbles, panics and crashes. Using incontrovertible data and overwhelming supporting evidence, with a direct connection to the foundations of behavioral finance, Covel takes you inside the core principles of trend following and shows everyone, from brand new trader to professional, how alpha gets pulled from the market.

Covel’s newest edition has been revised and extended, with 7 brand new interviews and research proof from his one of kind network.  This is trend following for today’s generation. If you’re looking to go beyond passive index funds and trusting the Fed, this cutting edge classic holds the keys to a weatherproof portfolio.

  • Meet great trend followers learning their rules and philosophy of the game
  • Examine data to see how trend following excels when the you-know-what hits the fan
  • Understand trend trading, from behavioral economics to rules based decision-making to its lambasting of the efficient markets theory
  • Compare trend trading systems to do it yourself or invest with a trend fund

Trend following is not prediction, passive index investing, buy and hope or any form of fundamental analysis. It utilizes concrete rules, or heuristics, to profit from a behavioral perspective. Trend Following is clear-cut, straightforward and evidence-based and will secure your financial future in bull, bear and black swan markets. If you’re finally ready to profit in the markets, Trend Following is the definitive treatise for a complex world in constant chaos.

Table of Contents

  1. Foreword
  2. Preface
  3. Section I Trend Following Principles
    1. 1 Trend Following
      1. Speculation
      2. Winning versus Losing
      3. Investor versus Trader
      4. Fundamental versus Technical
      5. Discretionary versus Systematic
      6. Hiding in Plain Sight
      7. Change Is Life
      8. Follow the Trend to the End When It Bends
      9. Surf the Waves
      10. Summary Food for Thought
    2. 2 Great Trend Followers
      1. David Harding
      2. Summary Food for Thought
      3. Bill Dunn
      4. Summary Food for Thought
      5. John W. Henry
      6. Summary Food for Thought
      7. Ed Seykota
      8. Summary Food for Thought
      9. Keith Campbell
      10. Summary Food for Thought
      11. Jerry Parker
      12. Salem Abraham
      13. Summary Food for Thought
      14. Richard Dennis
      15. Summary Food for Thought
      16. Richard Donchian
      17. Summary Food for Thought
      18. Jesse Livermore and Dickson Watts
      19. Summary Food for Thought
      20. Note
    3. 3 Performance Proof
      1. Absolute Returns
      2. Volatility versus Risk
      3. Drawdowns
      4. Correlation
      5. Zero Sum
      6. George Soros
      7. Berkshire Hathaway
      8. Summary Food for Thought
    4. 4 Big Events, Crashes, and Panics
      1. Event 1: Great Recession
      2. Event 2: Dot-com Bubble
      3. Event 3: Long-Term Capital Management
      4. Event 4: Asian Contagion
      5. Event 5: Barings Bank
      6. Event 6: Metallgesellschaft
      7. Event 7: Black Monday
    5. 5 Thinking Outside the Box
      1. Baseball
      2. Billy Beane
      3. Bill James
      4. Stats Take Over
      5. Summary Food for Thought
      6. Note
    6. 6 Human Behavior
      1. Prospect Theory
      2. Emotional Intelligence
      3. Neuro-Linguistic Programming
      4. Trading Tribe
      5. Curiosity, Not PhDs
      6. Commitment
      7. Summary Food for Thought
    7. 7 Decision Making
      1. Occam’s Razor
      2. Fast and Frugal Decision Making
      3. Innovator’s Dilemma
      4. Process versus Outcome versus Gut
      5. Summary Food for Thought
    8. 8 The Scientific Method
      1. Critical Thinking
      2. Linear versus Nonlinear
      3. Compounding
      4. Summary Food for Thought
    9. 9 Holy Grails
      1. Buy and Hope
      2. Warren Buffett
      3. Losers Average Losers
      4. Avoiding Stupidity
      5. Summary Food for Thought
    10. 10 Trading Systems
      1. Risk, Reward, and Uncertainty
      2. Five Questions
      3. Your Trading System
      4. Frequently Asked Questions
      5. Summary Food for Thought
    11. 11 The Game
      1. Acceptance
      2. Don’t Blame Me
      3. Decrease Leverage, Decrease Return
      4. Fortune Favors the Bold
  4. Section II Trend Following 
Interviews
    1. 12 Ed Seykota
    2. 13 Martin Lueck
    3. 14 Jean-Philippe Bouchaud
    4. 15 Ewan Kirk
    5. 16 Alex Greyserman
    6. 17 Campbell Harvey
    7. 18 Lasse Heje Pedersen
  5. Section III Trend Following
Research
    1. 19 A Multicentennial View of Trend Following
      1. The Tale of Trend Following: A Historical Study
      2. Return Characteristics over the Centuries
      3. Risk Characteristics over the Centuries
      4. Portfolio Benefits over the Centuries
      5. Summary
      6. Appendix: Included Markets and Relevant Assumptions
    2. 20 Two Centuries of Trend Following
      1. Introduction
      2. Trend Following on Futures since 1960
      3. Extending the Time Series: A Case-by-Case Approach
      4. Trend over Two Centuries
      5. Conclusions
      6. Notes
    3. 21 Trend Following
      1. Overview
      2. Introduction to Different Trend Following Models
      3. Diversification between Different Trend Following Models
      4. Aspect’s Approach to Trend Following
      5. Aspect’s Model Compared to Other Trend Following Models
      6. Conclusion
      7. Chart Disclaimer
      8. Note
    4. 22 Evaluating Trading Strategies
      1. Testing in Other Fields of Science
      2. Revaluating the Candidate Strategy
      3. Two Views of Multiple Testing
      4. False Discoveries and Missed Discoveries
      5. Haircutting Sharpe Ratios
      6. An Example with Standard and Poor’s Capital IQ
      7. In Sample and Out of Sample
      8. Trading Strategies and Financial Products
      9. Limitations and Conclusions
      10. Note
    5. 23 Black Box Trend Following—Lifting the Veil
      1. Synopsis
      2. The Strategies
      3. Performance Results and Graphs
      4. Sector Performance
      5. Performance of Long versus Short Trades
      6. Stability of Parameters
      7. Are CTAs a Diversifier or a Hedge to the SP500?
      8. Summary
      9. Note
    6. 24 Risk Management
      1. Risk
      2. Risk Management
      3. Optimal Betting
      4. Hunches and Systems
      5. Simulations
      6. Pyramiding and Martingale
      7. Optimizing—Using Simulation
      8. Optimizing—Using Calculus
      9. Optimizing—Using the Kelly Formula
      10. Some Graphic Relationships Between Luck, Payoff, 
and Optimal Bet Fraction
      11. Nonbalanced Distributions and High Payoffs
      12. Almost-Certain-Death Strategies
      13. Diversification
      14. The Uncle Point
      15. Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing
      16. Stress Testing
      17. Portfolio Selection
      18. Position Sizing
      19. Psychological Considerations
      20. Risk Management—Summary
    7. 25 How to GRAB a Bargain Trading Futures . . . Maybe
      1. Introduction
      2. How to GRAB a Bargain Trading Futures
      3. Following Trends Is Hard Work
      4. Figuring Out How the Pros Do It
      5. A Computer Model of the Pros
      6. A Terrible Discovery
      7. Solving the Mystery—Why Does the GRAB System Lose?
      8. Often It Is Out of Sync with the Market
      9. Worse Still, It Misses the Best Moves!
      10. Maybe Being Profitable Means Being Uncomfortable?
      11. GRAB Trading System Details
      12. Buys on Break of Support, Sells on Break of Resistance
      13. Testing Reveals Some Behavior I Do Not Expect
      14. Difference between Parameter Values Defines 
Character of GRAB System
      15. GRAB Trading System Code
      16. Indicator Setup
      17. Position Entry
      18. Position Exit
      19. Position Sizing
      20. Note
    8. 26 Why Tactical Macro Investing Still Makes Sense
      1. Introduction
      2. Managed Futures
      3. Defining Managed Futures and CTAs
      4. Where Institutional Investors Position 
Managed Futures and CTAs
      5. Skewness and Kurtosis
      6. Data
      7. Basic Statistics
      8. Stocks, Bonds, Plus Hedge Funds or Managed Futures
      9. Hedge Funds Plus Managed Futures
      10. Stocks, Bonds, Hedge Funds, and Managed Futures
      11. Conclusion
      12. Appendix A
      13. Appendix B
      14. Appendix C
      15. Review of Skewness and Kurtosis
      16. Note
    9. 27 Carry and Trend in Lots of Places
      1. Carry and Trend: Definitions, Data, and Empirical Study
      2. Carry and Trend in Interest Rate Futures
      3. Trend and Carry across Asset Classes
      4. Carry and Trend across Rate Regimes
      5. Conclusions
      6. Note
    10. 28 The Great Hypocrisy
  6. Epilogue
  7. Afterword
  8. Trend Following Podcast Episodes
  9. Endnotes
    1. Preface
    2. Chapter 1
    3. Chapter 2
    4. Chapter 3
    5. Chapter 4
    6. Chapter 5
    7. Chapter 6
    8. Chapter 7
    9. Chapter 8
    10. Chapter 9
    11. Chapter 10
    12. Chapter 11
    13. Section II: Trend Following Interviews
    14. Chapter 12
    15. Chapter 13
    16. Chapter 14
    17. Chapter 15
    18. Chapter 16
    19. Chapter 17
    20. Chapter 18
    21. Section III: Trend Following Research
    22. Chapter 19
    23. Chapter 20
    24. Chapter 21
    25. Chapter 22
    26. Chapter 24
    27. Chapter 26
    28. Chapter 27
    29. Chapter 28
    30. Epilogue
    31. About the Author
  10. Bibliography
  11. Acknowledgments
  12. About the Author
  13. Index
  14. EULA