Trend following how great trader make millions in up or down markets

m:mv8~-:m enbrrurrymv#-m&m mmimlmah*&~lt-~ -chard E Cripps, Legg Mason Chief Market Strategig I TREND I FOLLOWING How Great Traders Make Millions in Up or Down Markets MICHAEL COVEL $29.95 U.S / $42.95 Canada For 30 years, one trading strategy has consistently delivered extraordinary profits i n Bull and Bear markets alike: Trend Following Trend Following details the anti-Wall Street strategy that has made billions for some of the most successful traders of all-time But despite it's phenomenal performance,Trend Following is still seen as an underground trading strategy Even though it is used by many of the biggest moneymakers on Wall Street, many unfounded myths about trend following abound Michael Covel shatters the myths and details this little-understood trading strategy: The proof is in the results-Hard performance data from professional money managers All tile information you need in one numberWhy the market price tells you all you need to know to trade Pin pointing targets of opportunity-What to trade, when to trade it, and how much to trade How it's done: classic case studies-Who profited from the global scandals of the last 15 years and how they did it Meet the Trend Followers-Extraordinary trader profiles, including Bill Dunn, John W Henry, and Keith Campbell uww.ft-ph.com 1renti ice Hall 1/1\\/111 11\11 Praise for Trend Following "Miclzael Covel's Trend Follo\ving: Essential " Seykota, Trend Follower and Original IvParltet Wizard -Ed "Trend Following by Michael Cove[? I'm loilg this boolz " -Bob Spear, Developer of Trading Recipes Software "Michael Covel's Trend Following is a breakthrough book that cuptures the essence oj'what really makes marlzets tick Diligenth researched and comprehensive in scope, it will replace Market Wizards as the must-read bible for a new ge?zeratioiz of traclers " 4onathan Hoenig, Portfolio Manager, Capitalistpig I-Iedge Fund LLC, Fox News Contributor "Michael Cove1 lzas written the definitive book on Trend Followi~~g With careful research and clear insight he has caph~redthe esse?zce of the most success~ilo j all trading strategies Michael knows his subject nzatter and he writes about it with passion, conviction and enthusiasin This enjoyable and well written book is destined to become CL classic " -Charles LeBeau, author of Teclznical lhders Guide to Computer Analysis of the Futures Markets "Trend Following i s nit engrossing and educational,journey through the principles, piualls, players ancl psychology oj'aggressive technical trading oj'the investmei~tmarkets Rich i n its wisclonz mzd histo7icaE stucly." -Gerald ilppel, I'resident of Sigllalert Corporation and Publisher of Systcrns and Forecasts Newsletter "Coizventional wisdom says buy low and sell high, but what you izow that your favorite market-be it a stock, bond, or comnzodi+is at a n all-time high or low? For a completel3~different perspective, J?om people who actually make money at this business, take a look inside Michael Covel has written a timely and entertaining account of Trend Following-how it works, how to it, and who can it Wlzile it's not for everybody, it might befor you." -Charles Faulliner, NLP Modeler and Trading Coach, featured in numerous books including The New Market Wizards "I think the book did a superb job of covering the philosophy and thinking behind tl-endfollowing (basically w h y it works) You miglzt call it the Market Wizards of ?I-end Following " -Van K Tharp, Ph.D President, International Institute of Trading Mastery, Inc Van was originally profiled in The Market Wizards by Jack Schwager "I think that this book documents a great deal of what has made Trend Following Managers a successful part of the money management laizdscape (how they manage risk and investment psychology) It serves as a strong educational jzist$cation o n wlzy investors shozild consider using Trend Following Managers as n pnrt o j a n overall porSfolio strategy." -Tom Basso Retired CEO, Trendstat Capital Management, Inc., Scottsdale, AZ Tom was originally profiled in Tl~eN m Market Wizards by Jack Schwager "Michael Covel mizes a unique blend of w a d following matters with the thoughts aitd quotes of miccessJii1 waders, investors and society's leaders This is a valuable contribution and some of the best writing on mend following rue sea." -Robert (Bucky)Isaacson Managed Money and Trend Following Pioneer for 30+ Years "Trend Following: Definitely required reading for the aspiriilg ti-ader." -David S Druz Tactical Investment Management Trend Follower for 25 years, I-Ialeiwa, H I "Michael Cove1 reveals the real secret about trading-that there is no secret His points are peppered with w i s c l o m ~ o mexperts across the iizdtist~y." John Ehlers President, MESA Software Trend Following: How Great Traders Make Millions in Up or Down Markets Michael Covel An imprint of PEARSON Education London New York Son Froncisca Toronto Sydney Tokyo Singopore Hang Kang Cope Town Modrid Paris * Milan Munich Amsterdam Lihruly of Congress Cntnloging-in-PublicntionDatn Covcl, hlichael Trend fallowing: hotv greet trndcrs mnlre millions in up or down mnrlrets I hlichacl Covel p cm Includes bibliogmphicol references and index Investments Stooks I Title Phototmphy: hlork Finhcnstnedt Editoriul~roductionSupcn.ision: Donnn Cullcn-Dolce Covcr Design Dircotor: Jerly Vottn Cover Design: hlaw Jo DeFranco Executive Editor: Jim Boyd Editorinl ~\ssistanf:Richard Winlder hlrrrketing hlannger: John Pierce 2004 Pearson Educntion, Inc I'ublishing ns Finnncinl rimes Prentice Hall Upper Suddle River, New Jersey 07458 Finnncinl limes Prentice llilll offen excellent discounts on this book when ordered in quantity for bulk purohnscs or special snles For more informntion, please contnct: U.S Corporate and Govcmmcnt Snles, 1-800For snles outside of the US., please contnct: Intemntionni Snles, 382-3419, corpsnIes@peonontecl~~roup.com 1-317-581-3793, intcmationnl@pcnrsontcoh&oup.com Company nnd product names mentioned herein are the vndemnrlts or rcglstcrcd trndemarks of their respective owners N i rights reserved No pnrt of this book may be rcpmduccd, In any farm or by any means, wlthout permission in writing from the publisher Printcd in the United States of America Fifth Printing ISBN 0-13-144603-7 Penrson Educutian Ltd I'cunon Education Australia Pty Limited Peorson Educntion Singapare, Pte Ltd Pcnrson Education North Asin Ltd Pennon Education Cunndn, Ltd Pennon Educnci6n de hlcxico, S.A de C.V Pennon Educntion Japan Peanan Education Mnlnysia, Pte Ltd For all those investors and traders w h o w i s h they'd done things dgferently, n o w in need of a n aha! experience In an increasingly competitive world, it is quality of thinlcing that gives an edge-an idea that opens new doors, a technique that solves a problem, or an insight that simply helps make sense of it all We work with leading authors in the various arenas of business and finance to bring cutting-edge thinlcing and best learning practice to a global market It is our goal to create world-class print publications and electronic products that give readers lcnowledge and understanding which can then be applied, u~hetherstudying or at work To find out more about our business products, you can visit us at www.ft-ph.com FINANCIAL TIMES PRENTICEHALL BOOKS For more information, please go to www.fi-ph.com Business and Society Douglas K Smith On Value and Values: Thinking Differently About We in an Age of Me Current Events Alan Elsner Gates of Injustice: The Crisis in America's Prisons Economics David Dranove What's Your Life Worth? Health Care Rationing Wlio Lives? Who Dies? Who Decides? Entrepreneurship Oren Fuerst and Uri Geiger From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital David Gladstone and Laura Gladstone Venture Capital Handbook: An Entrepreneur's Guide to Raising Venture Capital, Revised and Updated Thomas K McKnight Will It Fly? How to Know if Your New Business Idea Has Wings Before You Take the Leap Stephen Spinelli, Jr., Robert M Rosenberg, and Sue Birley Franchising: hthway to Wealth Creation Executive Skills Cyndi Maxey and J i l l Bremer It's Your Move: Dealing Yourself the Best Cards in Life and Work Finance Aswath Damodaran The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies Kenneth R Ferris and Barbara S Pecherot Petitt Valuation: Avoiding the Winner's Curse International Business and Globalization John C Edmunds Brave New Wealthy World: Winning the Struggle for World Prosperity Robert A lsaak The Globalization Gap: How the Rich Get Richer and the Poor Get Left Further Behind Johny K Johansson In Your Face: How American Marketing Excess Fuels Anti-Americanism Peter Marber Money Changes Everything: How Global Prosperity Is Reshaping Our Needs, Values, and Lifestyles Bcane, Billy, 155 A Beautihll Mind (film), 219 Behavioral finance commitment and, 7 curiosity and, 17.1-76 discipline and, 166 emotional intelligence and, 169-71 false parallels and, 167 and Faulkner, 171-72 and Goleman, 169-71 greed and, 166 impatience and, 166 impulsive behavior and, 167 objectivity and, 166 overview, 163-64 present and, staying in the, 167 prospect theory, 16.1-69 and Seykota, 172-74 sunk costs, 16.546 truth and, 167 Benchmarks, 8 Blacl~,Fischer, 12.1-25 Black-Scholes Option Pricing Formula, 125, 127 Bogle, John, 186 Borish, Peter, Boston Red Sox, 44, 151, 154, 156-59 Bradp, David, 121 British pound, 31-32 Ahelson, N a n , 208 ~Ihraham,Salem, 12, 70-72, 223 ~IhrnhamTrading Company, 70, 121 ~Il~solute returns, 8 Absohitc Returns (Ineichen), 241 ~lcceptanceof trend following, 4 Anderson, Philip, 135 Animal House, The Movie, 168 Apple Computer, 234, 236 Asian Contagion, 136-39 B Bacon, Louis, 19-20, 5s Bnrntz, Morton, 15, 267-68 Parings Ban%collapse, 4 Barry, Dave, 212, 248 Bnrtholdson, Kristen, 110, 186, 194 Bartiromo, hlaria, 206 Bnseb:~llanalogy and Beane, 155 and Ilenry, home runs, 152-54 and Martinez, l5R-59 overview, 151-52 sahermetrics, 155 Basso, Tom, 6, 226, 230, 236 305 1 306 Trend Following: How Greot Troderr Make Millioor in Up or Down Morkels Brown University, 128 Bufiett, \%men, 2 Burlre, Gibbons, 216, 224 "Buy and Ilold: A Different Perspective" (Rudy), 199 Buy-and-hold system, 200-204 C I I California energy crisis, 118-19 CalPERS 209 Campbell, Keith, 6, 63-67, 242 background 64-65 drawdowns and, S 6 performance data, 66 Campbell and Company, 11-12,15-16,63 Chaos theory, 192-96 Chenier, Jean-Jacques, 195 Chesapeake Capitd klanagcment, 67, 121 Chicago Board of Trade, Chicago Mercantile Exchange, Christensen, Cla).ton hi., 184-85 Citadel Investments, 237 Cleland, Bruce, 23, 63, 64, 122, 129 Clients, 38-39 CNBC, 15, 243 Collins, Jim, 27 Commitment and behavioral finance, 176-77 Commodities Corporation, 57-58 Compounding, 9 Coniputer technology, 231-37 Condemnation of trend followers, 4 Conrad, Chet, 64 Conscientiousness and trend following, 248 Cool;, Eamshnw, 152, 155 Cooperman, Leon, 215 Correlation, 100-103 Covel, hlichael, 116 Cramer, Jnmes, 203 Critical thinking, 190-91 Cruden, Christopher, 21 Crude oil futures, 4 Culp, Christopher, 110, 148 Curiosity and behavioral finance, 174-76 Curve fitting, 231-37 D Day trading, 237 Decision-making frugality in, 181-84 innovation and, 8 Occam's razor and, 180-81 overview, 179-80 process versus outcome and, 185-86 speed of, 4 Dellutri, Dale, 74 Dennis, Richard, 18, 54, 73-77, 102, 227-28, 244-45 Derivatives Desai, Dinesh, 82 DiLaura Chnuncey 173.225 ~ i s c i ~ l i and n e bel;&ioral finance, 166 Discretionary tmding, 10-11 Dixon, Barbara, 79-80, 235 Doll:tr-cost averaging, 20.1-6 Donahue, hlanus J., 192 Donchian, Richard, 57, 77-80, 236 Drawdowns 95-100 and campbell, 6 and Dunn, 37 and recoveries, 112-17 Driehans, Richard, 153 Dries, Bill, 108 Drugstore.com, 243 D n ~ zDavid, , 59, 61, 99, 108, 218, 235 Dunn Bill 27-41.28-31 74 77 90 92 hackgrbund; 32-34 clients and 38-39 drando\vns and, 37 and Dunn Capital ivlanagement, M , 37-38.40 money management and, opportunities, taking, 31-32 performance data, 28-31 profit targets and, 35-37 risk management system, 28 Dunn, ~ a n i e l27,2d, , 3910 Dunn Capital hlanagement, 12 27.31-35 90 clients ind, 38-3q job posting at, 40 monthly newslettcr, 37-38 Eclrliardt, \\'illiam, 18, 73, 174, 233 Economist, The, 149 Efficient hlarliet IIypothesis, 125 Ehrlich, hlarty, 124 Einstein, Albert, 127, 185 Elam, Brent, 79 Emotional intelligence and behavioral finance, 169-71 Emotional Intelligeuce (Galeman), 170 Index Energy crisis of California, 118-19 Enron scandal 117-23 Events Asian Contation Barings B a n i coilapse, 140-43 future issues, 149 Gulf \\'ar, first, 147-48 LonE Term Caoital hlanagement fI,TCM) collapse, L Metalir?esellschaft 143-46 overvi&v, 109-11' stock crash of 1987, 146-47 stock market bubble, 112-24 Everest Capital, 128 Example of trading system Canadian dollar trade, 25S-59 overview, 255 system background information, 255-56 system details, 256-57 system performance, 259-61 - I I I False parallels and behavioral finance, 167 Fama, Eugene F., 125, 127 FAQS Can you offer insight on computers and cunre-fitting?, 234-37 IIolv much money I need?, 232-33 Is trend following for stocks?, 233-34 \\'hat are the limitations with day trading?, 237 What is a good example of the wrong way to view a trade? 237-39 Fanlkner, Charles, 70, 26, 62, 164,168, 171-72, 176,182, 191, 246 Federal Reserve announcements, 53 Feinstein, Diane, 118 Forrester., Iav ,, 58-59 Freud, Sigmund, 175-76, 190 Friedman Toni, 26, 223, 234 Frugnlity in decision-making, 181-84 Fundamental analysis, 6-8 Future issues, 149 G I Gardner David Gardner, Tom, Gieerenzer Gerd 181-82 192 ladw well, hialcolm, 130, 1.40 Glassman, James I(., 199, 204 Goleman, Daniel 169-71 Guod to Great (Collins), 27 Gould, Stephen Jay, 158 Graham Capital, 120 Greed and heha\~ioralfinance, 166 Greenberg, Nan, 175 Greenberg, Herb, 109-10 Griffin, Kenneth, 237 Griffith, Bill, 17 Grubman, Jack, 210-11 Gulf \\'ar, first, 147-48 I~hmer,Jim, , 264 Harding, David, 98 Ilanis, Jerry M., 265 Ilanis, Larry, 103-4 Harrison, Alfred 204 Ilawking, Stephen, 181 Flawley, Mark 49-50, 142 153-5i, 156-j8,228,236 background, 43-45 Federal Reserve announcements, reaction to, 53 prediction and, 43 Q&A ivitli, 49-51 research and, system of, lack of change in, 51-53 world-view of, 45-47 IIite, Larry, 109, 234, 241 Ilo, Thomas, 111 IIoenig, Jonathan, 9, 172, 201, 223, 233 Hoffer, Eric, 269 Floly Grails buy-and-hold system, 200-204 dollar-cost averaging, 204-6 overview, 199-200 retirement plans, 206-9 stock tips, 209-11 i ~ b n i eruns, baseball analogy and, 152-54 llostetter, ilmos, 57-58 flow to Wade in Stocks: The Livemiore F o r n ~ u l a f o rCombirring Time, Elenie~tt, a n d Price (Livermore), 82 Human behavior See behavioral finance III Offshore Advisors, 128 impatience and behavioral finance, 166 Trend Following: How Greot Troders Moke Millions i n Up or Down Markets I! : I I I l~i~pulsive behnvior and behaviornl finance, 167 Ineichcn, Alesaodcr, 241 Innovation and decision-making, M T l ~ e111nuwnto1-kDilei~~inn (Christensen), 184 International Traders Research (ITR), 89 i\n Introduction to Chaos Theory and Fractal Geometry (Donahue), 192 Investors, 5-6 Inwestors Business Daily, 140 J Iagr, Jaroniir, 233 James, Bill, 154, 156.57 lapanese yen, 29-31, 52-53 lob posting at Dunn Capital hlanagement, 40 John \\' Ilcnn and Co., 12, 15-16, 44-43 Jones, Paul Tudor, 21,57,204 K I i I Kaiinem;ln, D;111iel,16.1-65 I