Michael W. Covel searches. He digs. He goes behind the curtain to reveal a state of mind the system doesn't want you in.Michael teaches beginners to seasoned pros how to generate profits with straightforward and repeatable rules. He is best known for popularizing the counterintuitive and controversial trading strategy, trend following. His perspectives have garnered international acclaim and have earned him invitations with a host of organizations: China Asset Management, GIC Private Limited (Singapore), BM&F Bovespa, the Managed Funds Association, Bank of China Investment Management, the Market Technicians Association, and multiple hedge funds and mutual funds. He also has the distinction of having interviewed five Nobel Prize winners, including Daniel Kahneman and Harry Markowitz, on his Trend Following podcast—which now exceeds 500 episodes and 5 million listens.Michael's consulting clients include individual traders, hedge funds, sovereign wealth funds, and institutional investors in more than 70 countries. He splits his time between the United States and Asia.www.trendfollowing.com

• Foreword by Barry L. Ritholtz xvPreface xixSection I Trend Following Principles 11 Trend Following 3Speculation 3Winning versus Losing 9Investor versus Trader 10Fundamental versus Technical 11Discretionary versus Systematic 15Hiding in Plain Sight 17Change Is Life 19Follow the Trend to the End When It Bends 22Surf the Waves 262 Great Trend Followers 31David Harding 33Bill Dunn 37John W. Henry 49Ed Seykota 62Keith Campbell 69Jerry Parker 74Salem Abraham 75Richard Dennis 77Richard Donchian 83Jesse Livermore and Dickson Watts 873 Performance Proof 91Absolute Returns 92Volatility versus Risk 93Drawdowns 99Correlation 104Zero Sum 106George Soros 108Berkshire Hathaway 1114 Big Events, Crashes, and Panics 117Event 1: Great Recession 119Event 2: Dot-com Bubble 132Event 3: Long-Term Capital Management 145Event 4: Asian Contagion 157Event 5: Barings Bank 161Event 6: Metallgesellschaft 164Event 7: Black Monday 1675 Thinking Outside the Box 177Baseball 178Billy Beane 180Bill James 181Stats Take Over 1836 Human Behavior 189Prospect Theory 190Emotional Intelligence 195Neuro-Linguistic Programming 197Trading Tribe 197Curiosity, Not PhDs 199Commitment 2017 Decision Making 205Occam’s Razor 206Fast and Frugal Decision Making 207Innovator’s Dilemma 210Process versus Outcome versus Gut 2118 The Scientific Method 215Critical Thinking 216Linear versus Nonlinear 217Compounding 2229 Holy Grails 225Buy and Hope 228Warren Buffett 229Losers Average Losers 231Avoiding Stupidity 23610 Trading Systems 247Risk, Reward, and Uncertainty 248Five Questions 252Your Trading System 263Frequently Asked Questions 26411 The Game 273Acceptance 274Don’t Blame Me 276Decrease Leverage, Decrease Return 277Fortune Favors the Bold 278Section II Trend Following Interviews 28112 Ed Seykota 28313 Martin Lueck 29514 Jean-Philippe Bouchaud 31115 Ewan Kirk 31916 Alex Greyserman 33517 Campbell Harvey 35318 Lasse Heje Pedersen 367Section III Trend Following Research 38119 A Multicentennial View of Trend Following 383The Tale of Trend Following: A Historical Study 385Return Characteristics over the Centuries 388Risk Characteristics over the Centuries 398Portfolio Benefits over the Centuries 40020 Two Centuries of Trend Following 405Trend Following on Futures since 1960 408Extending the Time Series: A Case-by-Case Approach 412Trend over Two Centuries 41721 Trend Following 425Introduction to Different Trend Following Models 425Diversification between Different Trend Following Models 427Aspect’s Approach to Trend Following 429Aspect’s Model Compared to Other Trend Following Models 43122 Evaluating Trading Strategies 435Testing in Other Fields of Science 435Revaluating the Candidate Strategy 437Two Views of Multiple Testing 440False Discoveries and Missed Discoveries 442Haircutting Sharpe Ratios 444An Example with Standard and Poor’s Capital IQ 445In Sample and Out of Sample 446Trading Strategies and Financial Products 44723 Black Box Trend Following—Lifting the Veil 451The Strategies 452Performance Results and Graphs 456Sector Performance 458Performance of Long versus Short Trades 461Stability of Parameters 463Are CTAs a Diversifier or a Hedge to the SP500? 46624 Risk Management 471Risk 471Risk Management 471Optimal Betting 473Hunches and Systems 473Simulations 474Pyramiding and Martingale 474Optimizing—Using Simulation 475Optimizing—Using Calculus 477Optimizing—Using the Kelly Formula 478Some Graphic Relationships Between Luck, Payoff, and Optimal Bet Fraction 479Nonbalanced Distributions and High Payoffs 479Almost-Certain-Death Strategies 480Diversification 482The Uncle Point 482Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing 483Stress Testing 484Portfolio Selection 485Position Sizing 485Psychological Considerations 48625 How to GRAB a Bargain Trading Futures ... Maybe 489How to GRAB a Bargain Trading Futures 490Following Trends Is Hard Work 490Figuring Out How the Pros Do It 491A Computer Model of the Pros 492A Terrible Discovery 493Solving the Mystery—Why Does the GRAB System Lose? 494Often It Is Out of Sync with the Market 494Worse Still, It Misses the Best Moves! 495Maybe Being Profitable Means Being Uncomfortable? 496GRAB Trading System Details 496Buys on Break of Support, Sells on Break of Resistance 496Testing Reveals Some Behavior I Do Not Expect 498Difference between Parameter Values Defines Character of GRAB System 498GRAB Trading System Code 50026 Why Tactical Macro Investing Still Makes Sense 503Managed Futures 504Defining Managed Futures and CTAs 507Where Institutional Investors Position Managed Futures and CTAs 507Skewness and Kurtosis 507Data 509Basic Statistics 510Stocks, Bonds, Plus Hedge Funds or Managed Futures 511Hedge Funds Plus Managed Futures 512Stocks, Bonds, Hedge Funds, and Managed Futures 51327 Carry and Trend in Lots of Places 533Carry and Trend: Definitions, Data, and Empirical Study 536Carry and Trend in Interest Rate Futures 539Trend and Carry across Asset Classes 541Carry and Trend across Rate Regimes 54528 The Great Hypocrisy 549Epilogue 569Afterword by Larry Hite 575Trend Following Podcast Episodes 579Endnotes 583Bibliography 621Acknowledgments 635About the Author 639Index 641

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Michael W. Covel searches. He digs. He goes behind the curtain to reveal a state of mind the system doesn't want you in.Michael teaches beginners to seasoned pros how to generate profits with straightforward and repeatable rules. He is best known for popularizing the counterintuitive and controversial trading strategy, trend following. His perspectives have garnered international acclaim and have earned him invitations with a host of organizations: China Asset Management, GIC Private Limited (Singapore), BM&F Bovespa, the Managed Funds Association, Bank of China Investment Management, the Market Technicians Association, and multiple hedge funds and mutual funds. He also has the distinction of having interviewed five Nobel Prize winners, including Daniel Kahneman and Harry Markowitz, on his Trend Following podcast—which now exceeds 500 episodes and 5 million listens.Michael's consulting clients include individual traders, hedge funds, sovereign wealth funds, and institutional investors in more than 70 countries. He splits his time between the United States and Asia.www.trendfollowing.com

• Foreword by Barry L. Ritholtz xvPreface xixSection I Trend Following Principles 11 Trend Following 3Speculation 3Winning versus Losing 9Investor versus Trader 10Fundamental versus Technical 11Discretionary versus Systematic 15Hiding in Plain Sight 17Change Is Life 19Follow the Trend to the End When It Bends 22Surf the Waves 262 Great Trend Followers 31David Harding 33Bill Dunn 37John W. Henry 49Ed Seykota 62Keith Campbell 69Jerry Parker 74Salem Abraham 75Richard Dennis 77Richard Donchian 83Jesse Livermore and Dickson Watts 873 Performance Proof 91Absolute Returns 92Volatility versus Risk 93Drawdowns 99Correlation 104Zero Sum 106George Soros 108Berkshire Hathaway 1114 Big Events, Crashes, and Panics 117Event 1: Great Recession 119Event 2: Dot-com Bubble 132Event 3: Long-Term Capital Management 145Event 4: Asian Contagion 157Event 5: Barings Bank 161Event 6: Metallgesellschaft 164Event 7: Black Monday 1675 Thinking Outside the Box 177Baseball 178Billy Beane 180Bill James 181Stats Take Over 1836 Human Behavior 189Prospect Theory 190Emotional Intelligence 195Neuro-Linguistic Programming 197Trading Tribe 197Curiosity, Not PhDs 199Commitment 2017 Decision Making 205Occam’s Razor 206Fast and Frugal Decision Making 207Innovator’s Dilemma 210Process versus Outcome versus Gut 2118 The Scientific Method 215Critical Thinking 216Linear versus Nonlinear 217Compounding 2229 Holy Grails 225Buy and Hope 228Warren Buffett 229Losers Average Losers 231Avoiding Stupidity 23610 Trading Systems 247Risk, Reward, and Uncertainty 248Five Questions 252Your Trading System 263Frequently Asked Questions 26411 The Game 273Acceptance 274Don’t Blame Me 276Decrease Leverage, Decrease Return 277Fortune Favors the Bold 278Section II Trend Following Interviews 28112 Ed Seykota 28313 Martin Lueck 29514 Jean-Philippe Bouchaud 31115 Ewan Kirk 31916 Alex Greyserman 33517 Campbell Harvey 35318 Lasse Heje Pedersen 367Section III Trend Following Research 38119 A Multicentennial View of Trend Following 383The Tale of Trend Following: A Historical Study 385Return Characteristics over the Centuries 388Risk Characteristics over the Centuries 398Portfolio Benefits over the Centuries 40020 Two Centuries of Trend Following 405Trend Following on Futures since 1960 408Extending the Time Series: A Case-by-Case Approach 412Trend over Two Centuries 41721 Trend Following 425Introduction to Different Trend Following Models 425Diversification between Different Trend Following Models 427Aspect’s Approach to Trend Following 429Aspect’s Model Compared to Other Trend Following Models 43122 Evaluating Trading Strategies 435Testing in Other Fields of Science 435Revaluating the Candidate Strategy 437Two Views of Multiple Testing 440False Discoveries and Missed Discoveries 442Haircutting Sharpe Ratios 444An Example with Standard and Poor’s Capital IQ 445In Sample and Out of Sample 446Trading Strategies and Financial Products 44723 Black Box Trend Following—Lifting the Veil 451The Strategies 452Performance Results and Graphs 456Sector Performance 458Performance of Long versus Short Trades 461Stability of Parameters 463Are CTAs a Diversifier or a Hedge to the SP500? 46624 Risk Management 471Risk 471Risk Management 471Optimal Betting 473Hunches and Systems 473Simulations 474Pyramiding and Martingale 474Optimizing—Using Simulation 475Optimizing—Using Calculus 477Optimizing—Using the Kelly Formula 478Some Graphic Relationships Between Luck, Payoff, and Optimal Bet Fraction 479Nonbalanced Distributions and High Payoffs 479Almost-Certain-Death Strategies 480Diversification 482The Uncle Point 482Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing 483Stress Testing 484Portfolio Selection 485Position Sizing 485Psychological Considerations 48625 How to GRAB a Bargain Trading Futures ... Maybe 489How to GRAB a Bargain Trading Futures 490Following Trends Is Hard Work 490Figuring Out How the Pros Do It 491A Computer Model of the Pros 492A Terrible Discovery 493Solving the Mystery—Why Does the GRAB System Lose? 494Often It Is Out of Sync with the Market 494Worse Still, It Misses the Best Moves! 495Maybe Being Profitable Means Being Uncomfortable? 496GRAB Trading System Details 496Buys on Break of Support, Sells on Break of Resistance 496Testing Reveals Some Behavior I Do Not Expect 498Difference between Parameter Values Defines Character of GRAB System 498GRAB Trading System Code 50026 Why Tactical Macro Investing Still Makes Sense 503Managed Futures 504Defining Managed Futures and CTAs 507Where Institutional Investors Position Managed Futures and CTAs 507Skewness and Kurtosis 507Data 509Basic Statistics 510Stocks, Bonds, Plus Hedge Funds or Managed Futures 511Hedge Funds Plus Managed Futures 512Stocks, Bonds, Hedge Funds, and Managed Futures 51327 Carry and Trend in Lots of Places 533Carry and Trend: Definitions, Data, and Empirical Study 536Carry and Trend in Interest Rate Futures 539Trend and Carry across Asset Classes 541Carry and Trend across Rate Regimes 54528 The Great Hypocrisy 549Epilogue 569Afterword by Larry Hite 575Trend Following Podcast Episodes 579Endnotes 583Bibliography 621Acknowledgments 635About the Author 639Index 641

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Michael W. Covel searches. He digs. He goes behind the curtain to reveal a state of mind the system doesn't want you in.Michael teaches beginners to seasoned pros how to generate profits with straightforward and repeatable rules. He is best known for popularizing the counterintuitive and controversial trading strategy, trend following. His perspectives have garnered international acclaim and have earned him invitations with a host of organizations: China Asset Management, GIC Private Limited (Singapore), BM&F Bovespa, the Managed Funds Association, Bank of China Investment Management, the Market Technicians Association, and multiple hedge funds and mutual funds. He also has the distinction of having interviewed five Nobel Prize winners, including Daniel Kahneman and Harry Markowitz, on his Trend Following podcast—which now exceeds 500 episodes and 5 million listens.Michael's consulting clients include individual traders, hedge funds, sovereign wealth funds, and institutional investors in more than 70 countries. He splits his time between the United States and Asia.www.trendfollowing.com

• Foreword by Barry L. Ritholtz xvPreface xixSection I Trend Following Principles 11 Trend Following 3Speculation 3Winning versus Losing 9Investor versus Trader 10Fundamental versus Technical 11Discretionary versus Systematic 15Hiding in Plain Sight 17Change Is Life 19Follow the Trend to the End When It Bends 22Surf the Waves 262 Great Trend Followers 31David Harding 33Bill Dunn 37John W. Henry 49Ed Seykota 62Keith Campbell 69Jerry Parker 74Salem Abraham 75Richard Dennis 77Richard Donchian 83Jesse Livermore and Dickson Watts 873 Performance Proof 91Absolute Returns 92Volatility versus Risk 93Drawdowns 99Correlation 104Zero Sum 106George Soros 108Berkshire Hathaway 1114 Big Events, Crashes, and Panics 117Event 1: Great Recession 119Event 2: Dot-com Bubble 132Event 3: Long-Term Capital Management 145Event 4: Asian Contagion 157Event 5: Barings Bank 161Event 6: Metallgesellschaft 164Event 7: Black Monday 1675 Thinking Outside the Box 177Baseball 178Billy Beane 180Bill James 181Stats Take Over 1836 Human Behavior 189Prospect Theory 190Emotional Intelligence 195Neuro-Linguistic Programming 197Trading Tribe 197Curiosity, Not PhDs 199Commitment 2017 Decision Making 205Occam’s Razor 206Fast and Frugal Decision Making 207Innovator’s Dilemma 210Process versus Outcome versus Gut 2118 The Scientific Method 215Critical Thinking 216Linear versus Nonlinear 217Compounding 2229 Holy Grails 225Buy and Hope 228Warren Buffett 229Losers Average Losers 231Avoiding Stupidity 23610 Trading Systems 247Risk, Reward, and Uncertainty 248Five Questions 252Your Trading System 263Frequently Asked Questions 26411 The Game 273Acceptance 274Don’t Blame Me 276Decrease Leverage, Decrease Return 277Fortune Favors the Bold 278Section II Trend Following Interviews 28112 Ed Seykota 28313 Martin Lueck 29514 Jean-Philippe Bouchaud 31115 Ewan Kirk 31916 Alex Greyserman 33517 Campbell Harvey 35318 Lasse Heje Pedersen 367Section III Trend Following Research 38119 A Multicentennial View of Trend Following 383The Tale of Trend Following: A Historical Study 385Return Characteristics over the Centuries 388Risk Characteristics over the Centuries 398Portfolio Benefits over the Centuries 40020 Two Centuries of Trend Following 405Trend Following on Futures since 1960 408Extending the Time Series: A Case-by-Case Approach 412Trend over Two Centuries 41721 Trend Following 425Introduction to Different Trend Following Models 425Diversification between Different Trend Following Models 427Aspect’s Approach to Trend Following 429Aspect’s Model Compared to Other Trend Following Models 43122 Evaluating Trading Strategies 435Testing in Other Fields of Science 435Revaluating the Candidate Strategy 437Two Views of Multiple Testing 440False Discoveries and Missed Discoveries 442Haircutting Sharpe Ratios 444An Example with Standard and Poor’s Capital IQ 445In Sample and Out of Sample 446Trading Strategies and Financial Products 44723 Black Box Trend Following—Lifting the Veil 451The Strategies 452Performance Results and Graphs 456Sector Performance 458Performance of Long versus Short Trades 461Stability of Parameters 463Are CTAs a Diversifier or a Hedge to the SP500? 46624 Risk Management 471Risk 471Risk Management 471Optimal Betting 473Hunches and Systems 473Simulations 474Pyramiding and Martingale 474Optimizing—Using Simulation 475Optimizing—Using Calculus 477Optimizing—Using the Kelly Formula 478Some Graphic Relationships Between Luck, Payoff, and Optimal Bet Fraction 479Nonbalanced Distributions and High Payoffs 479Almost-Certain-Death Strategies 480Diversification 482The Uncle Point 482Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing 483Stress Testing 484Portfolio Selection 485Position Sizing 485Psychological Considerations 48625 How to GRAB a Bargain Trading Futures ... Maybe 489How to GRAB a Bargain Trading Futures 490Following Trends Is Hard Work 490Figuring Out How the Pros Do It 491A Computer Model of the Pros 492A Terrible Discovery 493Solving the Mystery—Why Does the GRAB System Lose? 494Often It Is Out of Sync with the Market 494Worse Still, It Misses the Best Moves! 495Maybe Being Profitable Means Being Uncomfortable? 496GRAB Trading System Details 496Buys on Break of Support, Sells on Break of Resistance 496Testing Reveals Some Behavior I Do Not Expect 498Difference between Parameter Values Defines Character of GRAB System 498GRAB Trading System Code 50026 Why Tactical Macro Investing Still Makes Sense 503Managed Futures 504Defining Managed Futures and CTAs 507Where Institutional Investors Position Managed Futures and CTAs 507Skewness and Kurtosis 507Data 509Basic Statistics 510Stocks, Bonds, Plus Hedge Funds or Managed Futures 511Hedge Funds Plus Managed Futures 512Stocks, Bonds, Hedge Funds, and Managed Futures 51327 Carry and Trend in Lots of Places 533Carry and Trend: Definitions, Data, and Empirical Study 536Carry and Trend in Interest Rate Futures 539Trend and Carry across Asset Classes 541Carry and Trend across Rate Regimes 54528 The Great Hypocrisy 549Epilogue 569Afterword by Larry Hite 575Trend Following Podcast Episodes 579Endnotes 583Bibliography 621Acknowledgments 635About the Author 639Index 641

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