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Trend Following. How to Make a Fortune in Bull, Bear, and Black Swan Markets. 5th Edition. Wiley Trading

  • ID: 3968932
  • Book
  • June 2017
  • Region: Global
  • 688 Pages
  • John Wiley and Sons Ltd
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"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, [external URL]

"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

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F o r e w o r d  b y  B a r r y  L .  R i t h o l t z  x v

P r e f a c e  x i x

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

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Michael W. Covel
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