T2W Trading Community

You profile several notable people in the book. What did you learn from these luminaries?

The best way to understand trend following is to meet the men and women who use it. While interviewing for the book I learned critical trading lessons such as how to think in the long term, how to cut losses, never change your core strategy, the importance of compounding, and how to win either way by going short.

After the book came out I spent the next six months going around the world doing extensive informational interviews with some of the greatest traders of today. The lessons I learned from these interviews are invaluable and I hope to share them one day with others in a second book. (See my blog: www.michaelcovel.com).

Here are just two of the hundreds of insights I have gathered:

• I met with the president of a trend following firm who manages over $3 billion dollars for clients. A very down to earth guy, his most direct advice was for people to focus on their plan and not stay preoccupied with others' plans. He drove home the point that if you dare to be great, in whatever your chosen profession, standing outside the crowd is where the great rewards will be found. If you only want to work for the man, you can't be the man.
• From another long time successful trader I gained a number of insights such as that there are many more Long Term Capital Managements ready to implode today. He pointed out that for the last 4 years the arbitrage ("stat arbitrage and convertible arbitrage") guys are using more and more leverage to generate less and less return ("too much gearing"). He added, "They think they have found the Key to Rebecca and they have not found anything." He also said: "When people's emotions drive their decision making, systems traders have the luxury of being able to stick with it."

In your book, you spend a considerable amount of time addressing the mental side of trading. What have you found to be the key determinants of success for the trend follower?

These recent months of in-person interviews with great traders have only reinforced what I believe to be the essential ingredient of success: entrepreneurial zeal. Whether soft-spoken and retiring or crazy-men, these guys are self-made, often several times over. And it's not the genius of a trend following system that makes them wealthy. It's their self-discipline, willingness to be responsible for what they do, and their hard work. Trend Following rules are the easy part. It's playing by them that is so difficult for many. Frankly it all comes down to defining what you really want. Most people don't want to become rich, they just want to be rich. That's no definition. That's a dream. To become anything you need entrepreneurial zeal, you need passion.

But I believe there are a number of key determinants:

• Lack of discipline – Traders are often lazy when it comes to the education needed to trade successfully.
• Impatience – Traders often have an insatiable need for action.
• No objectivity – Traders tend not to cut our losses fast enough. We marry our positions.
• Greed – Traders often want quick profits.
• Refusal to accept the truth – Traders often do not want to believe that the only truth is price.
• Impulsive behavior – Traders often jump into the markets based on a story in the morning paper or on MSNBC.
• Inability to stay in the present – Traders often spend time thinking about how they are going to spend their profits or regretting mistakes they made in the past
• Avoiding false parallels – Traders often look for patterns from the past that will enable them to predict what will happen in the future.

The quote by Carl Sagan, “It is far better to grasp the universe as it really is than to persist in the delusion, however satisfying and reassuring”, is a great reminder of what it takes for trend following success.