Here’s where the money is being made
No Stock Tips Please
My goal is to force you to think about a wide spectrum of subjects related to trend following. Sometimes I will contribute a lengthy written piece and other times my writing will be broken up to cover many subjects. Let’s face it, many times in life the brief nugget of information can be more life-changing than the 50-page research report!
Leading off this week please listen to my recent MP3 based podcast.
My audio rant on why we are all in the speculation business leads to an email received this week. Jake Carriker manages money for clients. He is a trader. He forwarded me an exchange he had recently with someone who had sent him an email. This individual wanted to know Jake’s “opinion” on the stock
(
CNC |
Quote |
Chart |
News |
PowerRating). Jake’s response:
“First, the tiresome explanation of my logic, then the bottom line. Much of my analysis of securities prices is based on rather blunt, possibly inappropriate, application of some principles from Newtonian physics to the markets. Objects (and if you buy what I am selling, stocks) in motion tend to stay in motion until they encounter an opposing force of sufficient magnitude to slow or reverse the current momentum. Keep in mind that much of the time there is an absence of momentum and stocks just kind of drift aimlessly sideways until some force kicks them off high-center. That’s the “objects at rest” part of that little ditty. Counterintuitively, I believe that one of my edges is my view that I can’t predict where, when, or how such a force might occur. Therefore, I tend to go with the flow. Luckily for me, since I didn’t go to MIT, the basics of “the flow” are pretty easy to measure. Broadly, it is: Price_Now – Price_BeforeNow = The Flow. The rub is that there are a lot of “before nows”. Different trends exist depending on which comparison point you pick. 5 minutes ago, 20 years ago, something in the middle? My cop out solution is to use multiple reasonable points of reference, and sometimes even average or otherwise combine them if I want to get fancy. I stay away from 100 year trends, because I don’t want to wait that long to find out if I am right or wrong. I stay away from 1 minute trends, because I don’t enjoy clicking the mouse and paying commissions all day long. As a reasonable compromise, I am usually interested in what price is doing over time frames ranging from the past few of years (maybe out to 10 years if I want to get an idea about “secular” trends) down to a timeframe of the past few weeks. So… all this stuff applied to the chart of CNC…I wouldn’t be trading it. It had a good strong uptrend going for the first few years of its existence. Price leveled off starting about the beginning of the year, and it has been pretty much going down ever since. In the short term, it jumped off its recent lows and is right now at a point where it would be typical to see the downtrend reassert itself. If it is really going to start going up, it has to stop going down first. That means that it probably retests the recent lows, or at least dips back toward them. If it then established a series of higher lows and higher highs, a good case might exist for a temporary interruption to a long term uptrend. If all of that sounds like a description of the price chart, and not much else, it is. I always have trouble giving advice to people that are holding stocks that are going down. Not because there is something inherently evil about it, just because it isn’t my way. Warren Buffet has lost more money than I will likely ever see by stubbornly holding onto a short dollar position (approximately $20 billion worth) for the last year as it goes against him. He seems to have done all right overall though. I tend to just get out if something is going down. If it starts going back up, I get in again. This costs me commissions and sometimes it costs me medium sized moves in a stock. However, it keeps me from ever getting wiped out when I am wrong, and I don’t miss the really big moves. That is a good tradeoff for me. It has the added bonus appeal that most people hate doing it, which means that given the zero sum game that is the markets, those folks might pay for all my losses and give me some nice profits to boot. Probably more information than you wanted, but I can never resist an opportunity to preach my gospel.”
I hope Jake’s subtle points are clear. While my impatience might simply tell this fellow to knock off the Holy Grail search for stock tips, Jake breaks it down to a logical explanation we can all appreciate.
What’s Trending Now? Where is the Money Being Made?
Below is a list of trend following type charts. Where in a trend do trend followers earn their profits? They capture the meat, or middle, of a trend. They never get in at the bottom, and they don’t get out at the top:
Chart 1
Chart 2
Chart 3
Chart 4
Chart 5
Chart 6
Chart 7
Chart 8
Chart 9
Chart 10
Chart 11
Chart 12
Chart 13
Chart 14
Chart 15
Chart 16
Chart 17
Chart 18
Chart 19
Chart 20
Chart 21
Everyone is a Winner? No.
Do the charts mean we all win? No. Trading is a zero sum game. It takes ‘losers’ to give ‘winners’ their profits. From Yahoo! Finance this week:
“China stands to lose at least 100 million US dollars on the London Metal Exchange after a bet by a state commodities trader went spectacularly wrong, a press report says. Citing a source close to China’s State Reserve Bureau (SRB), the South China Morning Post reported that SRB copper futures trader Liu Qibing took short positions equal to about 130,000 metric tonnes of copper in July and August. At the time, Liu paid about 3,300 dollars a tonne, expecting the price of copper to decline. Copper prices for delivery in three months’ time are now about 4,119 dollars a tonne, the paper said…Copper prices have soared this year, rising more than 30 percent, and on Monday they hit a record high of 4,132 dollars per tonne. Other reports say Liu may have acquired positions of up to 600,000 tonnes of copper and losses could be much higher when contracts expire on December 21.”
I am not picking on this trader from China. Losing traders making bad decisions have been padding the pockets of rich traders making correct decisions since the dawn of organized market trading. That’s life in zero-sum trading. The question you should always ask yourself, “What strategy should I use to stay on the side of the long-term winners?”
Michael W. Covel is the founder and President of Trend Following. A researcher of the most successful Trend Following investment managers, he has been in the alternative investments industry consulting on Trend Following to individual traders, hedge funds and banks for ten years. His best selling book, Trend Following: How Great Traders Make Millions in Up or Down Markets (Prentice Hall, May, 2004) is a complete and concise guide to trend following. It includes interviews with great trend followers who have won millions if not billions in the market. The trading world has embraced the book with endorsements from Van K. Tharp, John Mauldin, Ed Seykota and many more. Trend Following is now in its fifth printing, and is currently available in a Japanese translation with Chinese, German, French, Korean and Russian translations soon to follow. Teaching and sharing unique insights about Trend Following trading and alternative investments has earned Mr. Covel respect as a rational and logical voice in uncertain times. Mr. Covel also writes for numerous industry publications including Your Trading Edge, Stocks, Futures and Options Magazine and International Petroleum Finance and is consistently quoted and interviewed by a variety of financial publications.
Mr. Covel is also Managing Editor at TurtleTrader.com, the leading Trend Following news and commentary resource since 1996. Thousands of visitors from more than 70 countries as well as hundreds of trading professionals engaged in years of debate and interchange making the site the rich archive of trading information, data and opinion that it continues to be today. TurtleTrader, one of the largest & strongest trading community on the web with over 7.5 million unique visitors since its inception, also functions as a resource center for the Trend Following Educational Course.