Thursday, October 07, 2010

The Trend is Your Friend

Trend Following

Trend Following Introduction

What is trend following trading? Original Turtle Trader Dr Van Tharp offers:

"Let's break down the term 'trend following' into its components. The first part is 'trend.' Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices ... 'following' is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then 'follow' it."

Trend trading is reactive by nature. It does not forecast or predict markets or price levels. Prediction is impossible! Trend trading demands self-discipline to follow precise rules (no guessing or wild emotions). It involves a risk management system that uses current market price, the equity level in your account and current market volatility. Trend traders use an initial risk rule that determines position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, A trend trader's average profit per trade is significantly higher than the average loss per trade.

Trend trading is not a Holy Grail. It is not a passing fad or hyped-up secret black box either. Beyond mere rules, the human element is core. It takes discipline and emotional control to stick with trend trading through inevitable market ups and downs. Trend following seeks to capture the majority of a market trend, up or down, for profit. It aims for huge profits in all major asset classes -- stocks, ETFs, LEAPS® options, bonds, currencies, futures and commodities.

Think of it this way: trend following is the only strategy that you could trade on a desert island. As long as you have market data each day, everything else is useless (i.e. CNBC, news, fundamentals, broker opinions, talking heads, etc.) for making the big money. Keep that thought in mind as you read on.

Backstory (from Michael Covel)

When the first edition of my book 'Trend Following' hit the streets I had hoped to assemble the first comprehensive look at trend following trading. That goal was realized. How did I know? Since the first edition of 'Trend Following', I have met literally dozens of trend following traders managing collectively billions. Their feedback is validation. I never could have expected that a then obscure book would lead me to the likes of Nobel Prize winner Harry Markowitz and hedge fund managers Boone Pickens and David Harding, but it did.

Validation aside, October and November 2008 were the most historic market months since the Great Depression. Most people, most mutual funds, and most hedge funds lost huge. It has long been said that "genius is leverage in a rising market," and when the bubble popped in 2008 people positioned as genius weren't smart after all. While the rest of the world was creamed in 2008, trend followers made fortunes. Performance numbers for top trend following traders for October 2008 alone ranged from +5 percent to +40 percent. Making that much in one month when the rest of the world was losing big time was noteworthy to say the least.

However, uncertainty is the new norm, not a rare event. Consider a recent Wall Street Journal excerpt:

"For many investors, the market's turbulence hasn't just destroyed wealth. It has shattered their faith in the financial system itself. Consider Philip Eberlin, 56 years old, who runs a woodwork-restoration business in Chicago Heights, Ill. Trading hot stocks a decade ago, Mr. Eberlin got burned on picks like Krispy Kreme and Tyco. In 2007 he got back into stocks, only to take another hit. "Having been burned twice in 10 years," says Mr. Eberlin, he now has about 80% of his family's assets "protected from the market" in certificates of deposit and fixed annuities. "I don't have trust in Wall Street to help the small investor in any way, shape or form." Mr. Eberlin isn't alone. Late last year, Decision Research of Eugene, Ore., asked Americans how much they trusted bankers and other Wall Street leaders "to reduce the risk of the financial challenges the country is facing now." On a scale of 1 to 5, with 1 meaning no trust at all, the rating averaged a paltry 1.7."

Forget stock markets only going up. When the Fed rigs rates to boost stocks to unsustainable levels, bubbles, bubbles and more popped bubbles are normal. So can you really stomach your advisor telling you to, 'just hang in there'? Mutual fund managers and financial advisors charge huge management fees and deliver no return. Let's face it, mutual funds' buy and hold (hope) scheme will leave you underwater 20 years from now just like Japan. Guaranteed. Even during the bull market 90% of mutual fund managers failed. A child guessing could have beaten the overpaid suits. It is nonsense to stick with a broker, or any other sort of 'professional' who just takes your money.

The Start (from Michael Covel)

Sixteen years ago I had a life-changing experience. It eventually led to the creation of the now famous site TurtleTrader.com, the bestselling trading books 'Trend Following' and 'The Complete TurtleTrader' and the only honest film documentary to cover the decade's economic storm (titled 'Broke'). However, it did not start that way. It started with me as a political science graduate on the outside looking in. My path led to an MBA, which provided zilch in the way of moneymaking answers. Then something changed. A chance event lead to a unique discovery. What was that? The big winners use trend following to make up and down across all markets. They don't buy and hold. However, let's face it many people view making money wrong. They make horrible assumptions when asking these questions:

* Do winning traders all have some special talent?

* Do they have a special inborn gene or divine gift?

* Do they have the innate talent of a child prodigy?

* Do they have some inside knowledge?

* Do they have the ability to predict markets?

* Do they always have a degree in finance or MBA?

* Do they have huge starting capital?

There is one answer and it's the same answer: No. The reality of big money trading is far simpler. In my communications with great traders certain truths have been revealed:

* Innate talent is overrated. There is no magical talent that made the Turtles, for example, successful.

* Intense practice and persistence over and over again is the reason great traders make millions, not I.Q. In fact, E.Q. is more important.

* It is no coincidence that many top traders have their roots in the trading incubator Commodities Corporation. Richard Dennis, a subject of my second book, also proved how important coaching is to long-term success.

Successful coaching is not about motivational speeches, but rather delivering specific corrections at key times to let Aha! moments happen. However, you have to make mistakes to learn. The act of failing and fixing is when the learning magic happens. Repeating that process over and over again is when real human talent reveals itself. What stops us? We live in a world of instant gratification. We multitask. We watch Kim Kardashian's reality show. We sit on the Internet and our iPhone at the same time. Everything is now. Faster. Easier. There is no patience.

For great trend following traders it doesn't work that way. Patience is a necessity. LTCM, Amaranth, Enron, the Dot Com bubble, Bear Stearns, Lehman Brothers, AIG, Fannie Mae, Washington Mutual and the Bernard Madoff swindle are great examples of what can happen when you have no plan. Frankly, the demise of these entities should cause every investor to immediately dump their mutual funds, turn off the financial news and fire their brokers. Do that and there is hope.

However, forget get-rich-quick schemes. You will have to put in the work, time and dedication. How can we help you to make the big money? We modeled the trading methods and behaviors of great trend following traders in our trading systems.

That modeling has enabled us to teach their moneymaking techniques and behaviors with unparralleled results. These are trading methods that regardless of your gender, race, religion, or financial status create lasting results. The right trend trading behaviors can easily be installed into investors just like a software installation. And we have a 14-year track record of successful "installations." We've spent years painstakingly creating the most powerful trend following training available. We went behind the 'Wizard of Oz' curtain to learn directly from the trend following winners, in turn saving our clients money and years in research. Yet how do you prevent failure before you begin?

Everyone learns differently and our individual support allows you to connect with our support team at your trading level. All successful entrepreneurs, traders, executives and athletes have coaches and mentors. No trading method is beyond the comprehension of the average investor or trader, but the right coaching is pivotal. If you have a deep desire to make money and the ability to follow a proven, step-by-step system, you have a chance. So what is a trend following system?

A system is simply an idea. It's a trading idea for making buy and sell decisions in any market. A trader takes an idea, turns it into a mathematical formula and trades it to make money. A good trading system doesn't buy low or sell high; it rides trends. Great trend followers' success comes from the discipline to follow their rules no matter what. Our trend following trading systems answer the 5 critical questions:

* What market do you buy or sell at any time?

* How much of a market do you buy or sell at any time?

* When do you buy or sell a market?

* When do you get out of a losing position?

* When do you get out of a winning position?

How much money can be made as a trend follower? Fortunes have been made. John W. Henry, who bought The Boston Red Sox baseball team as but one example, made his $700 million to buy the team as a trend following trader. What are performance number examples over the decades? The returns are huge.

To make the big money you need a plan for all contingencies in all types of markets. When the unimaginable occurs, when the randomness and uncertainty of life kicks in (like our all too frequent market crashes), systematic trend traders remain calm. They know when to buy, sell, or adjust their positions -- before the chaos ever hits. You can apply our proprietary trend following rules in markets around the world from currencies to gold to silver to oil to stocks. How can one trading system trade all markets? People think that you need to know everything about a stock. You must guess what Apple is really doing. You must know crop report details. You must know gold mining. You must know about OPEC. All false. Consider this excerpt from my book "The Complete TurtleTrader":

"Tom Willis had learned long ago from Dennis why price, the philosophical underpinning of Donchian's rule, was the only true metric to trust. He said, "Everything known is reflected in the price. I could never hope to compete with Cargill [today the world's second-largest private corporation, with $70 billion in revenues for 2005], who has soybean agents scouring the globe knowing everything there is to know about soybeans and funneling the information up to their trading headquarters." Willis added [when talking about trend followers], "They don't know anything about bonds. They don't know anything about the currencies. I don't either, but I've made a lot of money trading them. They're just numbers. Corn is a little different than bonds, but not different enough that I'd have to trade them differently. Some of these guys I read about have a different system for each [market]. That's absurd. We're trading mob psychology. We're not trading corn, soybeans, or S&P's. We're trading numbers."

We don't teach fundamentals, predictions or value investing. Warren Buffett? Give us a break. If there was no government bailout, Buffett was out of business. At the end of the day there are no secrets or insider information needed to make the big money. There is only priceless information you don't yet have:

* We show how to trade for out-sized absolute returns on all markets.

* We teach how to be ready for markets to go up, down or sideways.

* No 'educated guesses' about what to do or chart reading.

* Think probabilities, not hunches.

* Fundamental factors are irrelevant.

* Many of the things you might think matter most matter least.

* You will go broke trying to trade with your 'gut'.

* Winners know how much they can lose at all times.

* Losers mistakenly dream about how much they can win.

You don't have to risk trading capital until you are 100% comfortable. You can back test or paper trade for as long as you need before investing real money. Our guarantee is solid. Our training includes everything you need to get up and going as a systematic trend following trader. You will learn:

* Proprietary and proven winning systems with clear examples.

* How to enter either on the long or short side at the right time.

* Where to place your stops to exit with a profit or a loss.

* How to use today's trading action for your next day signals.

* Learn trend following systems that trade all markets the same. No jargon, no secrets, no technical language. Just clear and comprehensive explanations of exactly what you need.

* Read our FAQs.

Final Words

San Diego, Jakarta, Singapore, London, South Africa, etc. -- the internet allows us to teach clients globally and you will be learning from a firm that has been on the 'inside' for over a decade. That access is unobtainable elsewhere. If you want to know how great trend following traders make their decisions, what rules they use for buying and selling, how they control risk and use it to make millions, we have assembled the most profitable, unique and proprietary trading systems available all from winners.

A trend following trading education is far less expensive than losing a fortune with zero plan. How much does our trading education cost? Consider it an investment in your future wealth. Bottom line, at the end of the day it comes down to one issue: making money. We can help you to exponentially increase your returns. Listen to our clients.

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