Adhering to Current Fads is a Must
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Michael Covel's latest book, Trend Commandments, offers insights into the world of trend following, a trading strategy that focuses on riding market trends rather than predicting them. Based on a 15-year study of top trend following traders, the book is a comprehensive guide for both new and experienced traders.
Key Principles in Trend Commandments
- Follow the Trend, Don’t Predict It The core idea is to identify when a market is trending (up or down) and enter trades that align with that trend rather than trying to forecast future price movements.
- Cut Losses Quickly A fundamental rule is to limit losses by exiting losing trades promptly. This is often accomplished with stop orders, ensuring small, manageable losses rather than big drawdowns.
- Let Profits Run Instead of taking small profits, trend followers hold on to winning positions to maximize potential gains, staying with the trend as long as it persists.
- Consistency and Discipline Matter Trend following requires sticking to a systematic approach and not letting emotions like fear or greed drive decisions.
- Use Mechanical Systems Many trend followers use rule-based trading systems to remove emotional bias and develop a repeatable process.
- Diversify Across Markets Covel emphasizes trading multiple markets (stocks, commodities, currencies, bonds) to spread risk and seize trends wherever they emerge.
- Risk Management is Crucial Proper position sizing and risk control guard against significant losses and protect capital.
Comparison with Traditional Buy-and-Hold Investing
| Aspect | Trend Following (Trend Commandments) | Buy and Hold Investing | |-----------------------|-----------------------------------------------------|------------------------------------------------| | Approach | Active trading based on price trends | Passive investing, holding assets long-term | | Market View | Markets can trend up or down; profit from both | Generally bullish, focusing on long-term growth| | Risk Control | Tight stop-losses and cut losses early | Risk managed through diversification and time | | Holding Period | Varies, often shorter, depends on trend duration | Long-term, often years or decades | | Emotional Aspect | Requires discipline, avoiding chasing losses/profits | Requires patience, ignoring short-term volatility| | Return Profile | Can profit in up and down markets, seeks positive expectancy | Gains mostly when markets rise | | Complexity | Involves active monitoring, mechanical systems | Simpler, less time-intensive |
Summary
In Trend Commandments, Covel advocates a dynamic trading approach that attempts to profit by riding persistent market trends, emphasizing risk control and discipline. This contrasts with traditional buy-and-hold investing, which relies on the general upward trajectory of markets over time and requires patience through volatility. Each approach has its merits, but trend following can potentially reduce losses during downturns by exiting early, while buy-and-hold benefits from long-term market growth and simplicity. The book is recommended for those who want to learn how to trade, with Jim Puplava, CEO of PFS Group, calling it essential reading.
The book, Trend Commandments, recommends applying the profits from trend following to diverse areas such as books or entertainment, as it advocates a dynamic trading approach that profits from persistent market trends. While reading the book, one might also gain insights into potential investment strategies in the realm of finance or investing.
