This is how the experts find trends
Gold: A Real Plan or No
Plan?
Gold has been in a nice trend. Some big money has
been made.
Of course as any good trend follower knows, if a
trend arrives you ride it. Unfortunately, the Wall Street press must attempt to
explain “why” a move has happened or offer some type of prediction for the
future. For example, these excerpts from the Bloomberg article Gold May Extend
Longest Rally This Year on Inflation Concerns are plain confusing when it comes
to actually using any of the advice to make money:
– “We’re going to see elevated inflation trends
over the short term. A lot of the hedge funds are selling crude oil and getting
into gold.”
– “Bloomberg’s survey has correctly forecast gold’s direction in 43 of 76 weeks,
or 57 percent of the time.”
– “Gold will continue to march higher over the next several weeks, if not
months.”
– “U.S. consumers are beginning to see $60 oil and $3 gasoline drive up prices
across the board, and this will eat into their disposable income. As the picture
gets gloomier for the U.S. economy, this will fuel the demand for gold as a
neutral currency and hedge against inflation.”
– “I won’t buy at these levels. If the market dips down to $468, $465, I will
buy.”
Put it this way, if a bunch of hedge funds are
selling crude oil and buying gold, what do you do EXACTLY? And if a forecast of
direction is right 57% of the time, what are we talking about exactly? How far
or long does the “direction” have to advance to be part of the so-called
accurate forecast? Then we have the comment by the guy not buying at “this”
price level. Does that mean buying “dips” is wise? Can you define for me the
term “dip” in mathematical terms?
These kinds of articles from Bloomberg, Yahoo,
etc. appear every day. They are useless. A healthy dose of critical thinking
applied over 5 minutes raises even more red flags than my few concerns. Isn’t
there another way to approach it? Yes.
Do you read these excerpts and immediately jump
up knowing when to buy or sell exactly? Do you hear these comments and know how
much to buy or sell short given your risk tolerance and capital on hand? Do you
have expectations that those shouting to buy gold will come knocking on your
door when its time to sell?
These fundamental blather articles might make
those quoted sound smart and knowledgeable, but there is simply no precision
when it comes to the big questions. How much? When do I exit? How do I know when
to exit with a loss or gain?
An even better question: how can we know the top?
A great trend follower, John W. Henry (JWH), tackles that very issue in his
September 2005 commentary:
“The same problem exists with the exit point on
the trade. Because JWH does not try and find the market tops, there will always
be some give back or price concession from the maximum. Note that if we tried to
get out before the maximum, there will still be a trading cost. It would be the
opportunity cost of not participating in the trade as it moves to the maximum.
We view that this cost is higher than the cost of exiting after the high. The
reason is simple. We cannot tell when or where the maximum price will occur.”
Do you see how more pragmatic and reasonable that
sounds as compared to the analysts and gurus?
But even if you can wrap your arms around sound
decision-making in an uncertain world, most people can’t escape the constant
drumbeat. Consider this excerpt from the USA Today in early October:
“Two devastating hurricanes. Slow government
response. Sixteen-hour, 200-mile traffic jams of fleeing residents. Levees
breached. Levees breached – again.
Tens of thousands displaced. Mold everywhere.
Elderly patients drowning in nursing homes. But that’s not all. A sideways stock
market. Rising interest rates. A barrel of oil at $67. Gas over $3 a gallon.
Consumer confidence down. It’s no wonder American investors are feeling
vulnerable.”
Wow. If I listened hard to this kind of stuff, I
should just quit. The game sounds like it is over. Of course, a good many people
read this and did nothing except retreat in fear.
Great traders, however, relish uncertainty. They
know that the unpredictable is where the big bucks are located. They harness
their fears. The great ones don’t read the doom and gloom in the USA Today. The
great traders were prepared for the gold move long before it started. They had a
plan ready before the trend ever hit the radar screen.
You always have a choice: enter a market like
gold with a plan like John W. Henry or listen to the fundamental prophets who
talk about buying on “dips”.
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.