Book Review: Trend Following

Trend Following - How Great Traders Make Millions in Up or Down Markets
Michael Covel
ISBN 0131446037

This book is a useful introduction to the philosophy behind trend following and some evidence for its success, but is written like a fiery sermon from a true believer, rather than a fair evaluation.

In 1989 Jack Schwager wrote Market Wizards. He interviewed many of the traders with the most impressive or consistently good trading results, and asked them sensible questions about themselves, their methods, and their beliefs on what it took to be a good trader. He had a background as a trader himself, but tried to listen openly, and not be judgemental and report accurately, focusing on similarities and differences in the answers he got. It led to an excellent book.

Michael Covel's book clearly wants to be a new "Market Wizards", focusing on Trend Followers. Trend Followers are traders who trade not from any understanding of the underlying fundamentals of the market or prediction of the future, but on the belief that human nature means that markets going up will tend to keep going up, and markets going down will tend to keep going down.

Unfortunately, the book reads like it was written by an enthusiastic person who has been hanging around some very smart people and hero worships them. Covel seems to think Trend Followers can do no wrong, and non Trend-Following traders are stupid and destined for a fall. For example, he consistently says that trend followers don't make predictions about the future, and derides non-trend followers for making such predictions. However, every time a trend follower goes long they are predicting the price will go up, and if they go short they are predicting the price will go down. Of course, they accept that their predictions will often be wrong, and get out quickly, but the implicit prediction is there.

Also, despite his claim "if we could have developed a book comprised of only numbers, charts and graphs of Trend Following performance data, we would have", there is very little hard data. What data there is, is usually presented very badly, for example, 3D absolute return bar charts with a log scale. I think he really needs to read Tufte.

If you want to read some useful quotes about trend following, and get a good feel for their philosophy then I would read this book, but don't read it as a balanced debate on different styles of trading.