INTERVIEW

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Following Trends, Up Or Down

Michael W. Covel
by Jayanthi Gopalakrishnan

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The author of Trend Following: How Great Traders Make Millions In Up Or Down Markets and a researcher of the most successful trend-following investment managers, Michael Covel has been consulting on trend-following to individual traders, hedge funds, and banks for 10 years. Teaching and sharing unique insights about trend-following, trading, and alternative investments has earned him respect as a rational voice in uncertain times. He can be reached at www.michaelcovel.com and www.trendfollowing.com.

STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Michael Covel via telephone on March 31, 2005.

What led me to trend-following was curiosity. I was looking
at performance data and what all those who played the trends made.

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What led me to trend-following was curiosity. I was looking at performance data and what all those who played the trends made. Occasionally, I would read an article in STOCKS & COMMODITIES or Futures, but I didn't find much about these traders and I couldn't figure out why Main Street and Wall Street weren't preoccupied with them. How could they not be? If you just look at their performance numbers, you can see how much money they've pulled out of the market. So I had this insatiable curiosity to figure out the puzzle.

And were you trading the markets at some point?

We all start out trading, whether it is with a good strategy or a bad one. These days, I keep money with trend-following traders. I also try to maintain a trend-following mindset in other areas of my life, from real estate to starting businesses.

Did you try other types of trading besides trend-following?

Due to the lack of information out there on trend-following, everyone seems to be first exposed to fundamental trading - myself included. I had a conversation with a trend-follower the other day who spent the first 15 years of his career as a fundamental trader before a lightbulb turned on and he started to trade using trend-following techniques. At some point in our careers, we all start out thinking: "After I gather all this fundamental information about a market, then I will know the secret." At some point, a lightbulb does click on, but what you realize is that it doesn't work.

How is a trend-follower different from other types of trader?

Trading - the way you enter and exit a market - could really be anything. The trend-followers I write about in my book have a fairly specific strategy. First, they select a portfolio and the markets they're going to track. Then they wait to see if a market starts to move. And if it does, either up or down, then a trend-follower will take an initial long or short position, depending on the direction of the market.

The age-old market wisdom is that you're going to run with that position for as long as it goes in your favor. You're not going to guess, or predict, or forecast the direction. You don't know why the market is going up. And frankly, I haven't met a great trend-follower yet who really cares why the market's moving. He just says, "My #1 goal is to get on these moving markets and have risk management so I know that if the market goes against me, I know where and when to exit."

That frame of thinking might be the big difference. Trend traders always know what their loss point is. They don't know what the upside is going to be, but they know what the downside is. They're risk managers.
 

  ...Continued in the June issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the June 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.