The Little Book of Trading - Michael Covel.

[kenvbtx 10]

I copied this page from the book. I underlined a few sentences, the part i don't understand, and was wondering if any of you can help me out on this. Thanks. - Kim

 

On page 133-134.

 

Trend Following works on stocks, too, and who better to teach us than two guys who wrote a paper called, "Does Trend Following Work On Stocks?". It outline their strategy. They use a 10 ATR stop. ATR stand for "average true range". The true range is simply how far a stock moves in a given day, like standard deviation, but it includes the gaps---if a stocks gaps up or gaps down.

 

So for General Electric (NYSE:GE), it's average true range might be $0.80 right now. That is the typical daily move, including the gap. So they multiply the ATR by 10 and trail that from the purchase price, which is the all-time high. Their stops on average are about 28 to 30 percent away for a typical stock. For a really volatile stock, it might be 50 percent away. For a really quiet stock it might be as close as 10 or 12 percent.

 

The average true range measures the volatility of the stock in question, so your trailing stops loss is adjusted according to each stock's volatility. That type of thinking, a counter-intuitive system---that's what you want.

[onesmith 10]

When they say the purchase price is the all time high that could have been worded better. Typically a trailing stop is subtracted from the max favorable excursion which is the highest price following an event that defines the entry or same as saying the highest theoretical exit price that could have been achieved.

 

The generalizations about percentages are extrapolations based on the fact that the value of 10 units of ATR will increase or decrease simultaneously with an increase or decrease in volatility.

 

 

I copied this page from the book. I underlined a few sentences, the part i don't understand, and was wondering if any of you can help me out on this. Thanks. - Kim

 

On page 133-134.

 

Trend Following works on stocks, too, and who better to teach us than two guys who wrote a paper called, "Does Trend Following Work On Stocks?". It outline their strategy. They use a 10 ATR stop. ATR stand for "average true range". The true range is simply how far a stock moves in a given day, like standard deviation, but it includes the gaps---if a stocks gaps up or gaps down.

 

So for General Electric (NYSE:GE), it's average true range might be $0.80 right now. That is the typical daily move, including the gap. So they multiply the ATR by 10 and trail that from the purchase price, which is the all-time high. Their stops on average are about 28 to 30 percent away for a typical stock. For a really volatile stock, it might be 50 percent away. For a really quiet stock it might be as close as 10 or 12 percent.

 

The average true range measures the volatility of the stock in question, so your trailing stops loss is adjusted according to each stock's volatility. That type of thinking, a counter-intuitive system---that's what you want.

[kenvbtx 10]

Thank you for your answer. The all-time high statement did confuse me. So now I'm going to try do some math here.

 

Let's say GE is at $20.

ATR is $0.80.

$0.80 x 10 = $8.00

Trailing Stop = 30% of $8.00 = $2.40; $20.00 - $2.40 = ($17.60)

 

Did I calculate the trailing stop correctly?

[kenvbtx 10]

Thank you for your answer. The all-time high statement did confuse me. So now I'm going to try to do some math here.

 

Let's say GE is at $20.

ATR is $0.80.

$0.80 x 10 = $8.00

Trailing stop = 30% of $8.00 = $2.40; $20.00 - $2.40 = ($17.60)

 

Did I calculate the trailing stop correctly?

 

 

 

*second submit reply, guess the first one didn't go through I suppose*

[kenvbtx 10]

Thank you for your answer. The all-time high statement did confuse me. So now I'm going to try to do some math here.

 

Let's say GE is at $20.

ATR is $0.80.

$0.80 x 10 = $8.00

Trailing Stop = 30% of $8.00 = $2.40; $20.00 - $2.40 = ($17.60)

 

Did I calculate the trailing stop correctly?

[onesmith 10]

The authors reason for mentioning percentages appears to be based on a belief that it will make it easier for readers to relate to but my interpretation is the percentages are not part of the way he's calculating this particular trailing stop

 

If I chose to use 10 units of ATR as he suggests in the book and atr = .8 then 10 * .8 = 8. If entry price = 20 then the initial stop = 20 - 8 = 12. The trailing part of the stop enables the stop to follow price upward but not downward. So if price goes up while I still own it ...to for instance 24 and atr remains at .8 then the stop will increase to 24 - 8 = 16.

 

Thank you for your answer. The all-time high statement did confuse me. So now I'm going to try to do some math here.

 

Let's say GE is at $20.

ATR is $0.80.

$0.80 x 10 = $8.00

Trailing Stop = 30% of $8.00 = $2.40; $20.00 - $2.40 = ($17.60)

 

Did I calculate the trailing stop correctly?

[SIUYA 11]

onesmith has got it right - ignore the percentages......

 

When they talk about "all time high" it was talking about it because that was what they used for the entry trigger.

Covel talks about (but controversially so - may or may not trade) long term trend trading....and often a measure to trigger an entry into an instrument is to buy recent new highs, or all time highs.

You could use the same ATR stops on any entry trigger method, however 10 ATR stops are likely to be considered very wide unless you are long term trend following

[Kiwi 16]

Covel is a famous "can't trader" who made is his initial dollars selling a pathetically poor quality course based on the turtle trading system. Now he takes newbies by writing books. At least he doesn't post here yet.

[thalestrader 14]

There is no value to reading Covel. Throw his book(s) away and look elsewhere.

 

Covel more quickly than most made the progression from wannabe trader to failed trader to vendor to wannabe traders.

 

No doubt his publicist will find this thread and he will soon post here - like anyone who depends on a perpetual stream of suckers rather than his own talents and abilities, he can stand no negative criticism. His inability to acknowledge his own shortcomings no doubt played a substantial role in his failure as a trader.

 

Best Wishes,

 

Thales

[BlueHorseshoe 10]

Covel is a famous "can't trader" who made is his initial dollars selling a pathetically poor quality course based on the turtle trading system. Now he takes newbies by writing books. At least he doesn't post here yet.

 

Another amusing trait is that, despite numerous books singing the praises of trend-following, I have watched him conduct webinars where he attempted to scalp crude from a one minute chart.

 

Nevertheless, his books on trend-following are well written and a good introduction to the subject, so I certainly wouldn't dismiss them just because Covel himself is probably a "can't trader".

[Minetoo 10]

A simple litmus test for all gurus and so-called experts is to demand independently audited brokerage account statements from them. Makes for a very short list of authors worth following.

[zdo 20]

:more hijacking and offtopic from OP: re Covel

 

Want to save some time and money?

Would you like me to teach you EVERYTHING you need to learn from all of Covel’s published works?

Here it is - In true trend trading, outliers ARE the edge.

 

ie a ‘real’ trend trader is not trying to improve entries, is not trying to prevent or diminish losses… he or she is simply entering positions with the trend and waiting for outlier moves - period…

 

EVERYTHING else Covel (or anyone else) says about real trend trading is superfluous (however inspirational, motivational, etc it may otherwise be)… no need to spend time and money on his promotions, books, and courses

[BlueHorseshoe 10]

:Here it is - In true trend trading, outliers ARE the edge.

 

Which is why true 'trend following' systems tend to be stop and reverse, and always in the market, rather than the more complex breakout strategies associated with the Turtles etc.

 

I would suggest, however, that compounding of returns is also a key part of the 'edge' that trend-followers exploit - if you take away this aspect their returns are invariably dismal.

[zdo 20]

Which is why true 'trend following' systems tend to be stop and reverse, and always in the market, rather than the more complex breakout strategies associated with the Turtles etc.

 

Precisely...

 

re:

...compounding of returns is also a key part...

Yes – for those who really thrive. Actually, due to the high loss counts, optimal sizing is much more important in real trend trading than “compounding”

However, didn’t get into that because across time I’ve found it best during development not to co-mingle edge work with mm work … best to limit the ‘edge’ concept to the systemic – entries and exits... then, post edge establishment, to layer money management models (sizing, compounding, etc.) onto the strong ‘edge’ footing .

 

re

...invariably dismal...

Real trend trading, sans any mm ‘tricks’, is an edge – provided the trader has enough staying power and a long enough life to wait for the outliers…

Compounding into a negative edge – now, that would be ‘invariably dismal’ :doh:….

using sizing (and compounding, mm in general) to compensate for marginal edge(s) takes a very specific and extremely rare type of mentality --- not recommended for ‘normals’ and noobs at all…

 

...nitpickin... to "do no harm"...

[BlueHorseshoe 10]

However, didn’t get into that because across time I’ve found it best during development not to co-mingle edge work with mm work … best to limit the ‘edge’ concept to the systemic – entries and exits... then, post edge establishment, to layer money management models (sizing, compounding, etc.) onto the strong ‘edge’ footing .

 

That's interesting - I completely ignore money management when developing a system as well. If something doesn't work well with a single contract approach, then there is no edge there for the MM to improve.

[SIUYA 11]

That's interesting - I completely ignore money management when developing a system as well. If something doesn't work well with a single contract approach, then there is no edge there for the MM to improve.

 

actually given that you think trend following is about outliers, then MM can be fairly important here....

Aim is to have the maximum amount on for an outlier.

 

It depends on what you are trying to achieve really. There are many ways to ride/play/enter/exit a trend. depending on what you wish to achieve.

stable steady returns....a potential hedge against other investments.....highly leveraged opportuniites into calamity/outliers.....

 

testing for 1 contract is interesting for entry v exit and effieiciency of these (for want of a better word play), however, its the pyramiding (and again this is another parameter) than can make a lot of difference. I have run some tests (rudimentary admittedly) which show pyramiding really works when it works and is slightly worse when it does not.

 

Another thing that needs to remembered with trend following is that often its diversification that helps a lot (especially with the compounding) and interestingly enough taking profits can also help (system dependent ).....The other thing a lot of people gloss over, which you mention with the always in the market.....all in or all out is difficult with size, scaling in out is often employed, hence the importance of MM. (The aim is always to get the meat and not just the scraps)

How many retail systems or any systems allow you to backtest portfolios PROPERLY - in terms of scaling, portfolio and concentration risk.....???

[zdo 20]

more nit picking...

 

I was already off topic from the OP / joining in the bashing with the statement

"In true trend following, outliers ARE the edge"

Our expansion into the MM aspects(compounding, sizing, diversification, pyramiding) is even further off topic

Even if he covers MM in everything he releases, if Covel were reading this thread, he might bristle – understandably

 

There are many ways to ride/play/enter/exit a trend. depending on what you wish to achieve.

 

Trading With Trend

the ‘many ways’ to exploit trends is

Trading with the trend… ie

Trading utilizing the trend

it’s basically

Trading (with whatever means puts you in what most likely is the right direction)

ie the emphasis is on the ‘Trading” part… on trading decisions./ whatever to exploit the “many ways to ride/play/enter/exit a trend. depending on what you wish to achieve”… “scaling in out”… etc, etc the 10000 ways...

 

 

True Trend Trading

in true trend trading, the

“trading” part of the ‘sentence’ has virtually no emphasis

it’s basically

True Trend Trading

There are no “many ways to ride/play/enter/exit a trend. depending on what you wish to achieve” in True Trend Trading. There is no requirement to enhance, support, etc true trend trading with leveraging, compounding, sizing, diversification, pyramiding, scaling,

 

SUIYA, I’m not criticizing your thoughts about Trading with Trend. I’m just saying for those readers who might be interested in Covel – everything after post 7 in this thread is seriously off topic and then quickly careens into mishing up / lack of differentiation between Trading With Trend and True Trend Trading... enough for me to nitpick for the noobs' sake.

 

Why am I pounding on this distinction? True Trend Trading is the most recessive, undeveloped aspect of my trading. I am a Trading With Trend trader through and through… so … all the while I just ‘believed’ in true trend trading (before M. Covel was even out of high school, btw) My beliefs were supported by a great ride in the indexes through the nineties. But - belief is what you do when you don’t know. It took building cash / physical positions in the metals in the late nineties and watching them ‘outlier’ for me to know the difference between True Trend Trading and Trading With Trend …

 

All the best

[SIUYA 11]

more nit picking...

 

SUIYA, I’m not criticizing your thoughts about Trading with Trend. I’m just saying for those readers who might be interested in Covel – everything after post 7 in this thread is seriously off topic and then quickly careens into mishing up / lack of differentiation between Trading With Trend and True Trend Trading... enough for me to nitpick for the noobs' sake.

 

I would not think its nit picking so dont worry....but maybe I am missing something in the nuances.....

IMO.....

Trend following - is trading with the trend.....

Trend following can also be True Trend trading.

Covel seems more concerned with long term trend following.....what I think you are calling true trend trading. (????)

and while there is a mish mash.....thats trading

 

Maybe I should have written long term trend followers as opposed to just trend followers.

 

but I was a bit confused by your quote "There is no requirement to enhance, support, etc true trend trading with leveraging, compounding, sizing, diversification, pyramiding, scaling,"

 

There is never any requirement for any of these, but they do make a big difference in many systems, otherwise every CTA attempting such things should theoretically end up getting similar results.....but they dont. With all these variables/parameters as inputs in systematic (not discretionary) systems then they do make a difference.

 

If I am reading you right, maybe you are saying that this is largely irrelevant is True trend following (as opposed to trading) is more a mindset than a system.....

 

(I also dont think this is off topic at all..... If its about how or why one might be interested in the books - he also sells (or did) the turtle trend systems which do have all the trading parameters...,hence some of his controversy)

[zdo 20]

maybe I am missing something in the nuances

If you or others find it best to leave the distinction between the two blurry, on a continuum, in your internal representations that’s fine. I can definitely see the continuum too. However, I’ve found it is best for me to make a very separate distinction between the two – at first because of my own challenges to include both and switching between the two. Then later through a increasing awareness of how watered down, pasty pabulumy, and “off topic” communication gets in discussions about trend in general... not very helpful ultimately in the Beginners Forum imo

 

True Trend Trading

-determine trend - to determine trend use the simplest, dumbest method you can imagine or as complex a method for determining trend you can devise… it must just be barely good, ie You’re method for determining trend does not have to be great!

-if up, go long

if dn, go short

-(pile up the losses and) wait for outliers - period

 

Trading With Trend

-includes every method that in any way considers trend but does not necessarily fully and totally and completely depend on trend

-includes trading in and out in the direction of the trend

-includes trading with “trend” direction in the back of your mind

-includes trading with “trend” direction part of the system … swing trading… top down multiple time frames… etc… etc…

 

Entries and exits ( targets, stops,etc) are increasingly precise going towards the ‘Trading With Trend ’ tail of the ‘continuum’ – no matter how they are derived ( arbitrary, PA, divergences, statistical/quant, fundamentals, news and events, whatever)

(… and yes a trade may, by chance, participate in an outlier move - but the day to day goal is to exploit day to day / non outlier opportunities)

Entries and exits!!! Wycoff, Hershey, Williams… to name just three examples that happen to pile up huge post counts on TL…Gann, Elliott, etc etc etc etc and others, and some not so famous xperts don’t pile up big post counts in TL, but ALL of them (and all of their re-inventors) are going for one thing!!!! - Optimal entries and exits!!!

…biases exuding all over the place going into a position …biases exuding all over the place going out of a position…

…considerations of contexts going in, considerations of contexts going out

…and, yes, “mindsets” are all over the place too. not two but thousands of different mindsets are involved here. Yes the mindset of True Trend Trading is different … but the mindsets of the thousands of varieties of Trading With Trend are all different too… All require different ‘mindsets’ because each has different heuristics.

...Ultimately, the ones who recover fastest win…(another dang ‘shortism’... a 'shortism' is a whole book in one phrase :lookout:)

 

Covel seems more concerned with long term trend following.....what I think you are calling true trend trading. (????)

…Maybe I should have written long term trend followers as opposed to just trend followers

Holding period / time frame is not a consideration at all in the points I’m trying to make….

 

 

hence some of his controversy

his “controversy” comes because he serially follows and reports examples of successful traders and managers (who got that way by mixing all the mm stuff in, btw – see below) and tries to make money off publishing about it. ie

his “controversy” comes from sliding all over the continuum we have been discussing - without admitting it.

his “controversy” comes because he utilizes stirring controversy, mixed in with ‘motivation speak’, etc. to make money off it…

so, in my first post, I just noted that nothing more is to be gained from his published material than from ‘wizard’ books or any other books that happen to have the “trend” word in the title or subtitle or introduction with the simple statement / 'shortism'

---- “In True Trend Trading, outliers ARE the edge.” ---

Obviously it was unsuccessful, but primarily my intention was to make clear that distinction between the two ways…and once you get that distinction you don’t need any more Covel …

 

re…

but I was a bit confused by your quote "There is no requirement to enhance, support, etc true trend trading with leveraging, compounding, sizing, diversification, pyramiding, scaling,"

 

There is never any requirement for any of these, but they do make a big difference in many systems, otherwise every CTA attempting such things should theoretically end up getting similar results.....but they dont. With all these variables/parameters as inputs in systematic (not discretionary) systems then they do make a difference.

 

We further careened doubly off topic by incorporating all the various MM stuff. It started with compounding. I added sizing. Then came pyramiding, etc…just the mentioning of MM weaves it into the very fabric what noobs see and have to deal with… pouring in dye about the benefits (and perils) of MM tricks clouds things even further. I went back and looked at the posts and , for me. it’s still not a stretch to see how many could read into it “Oh, it’s MM that gets trend trading over the top” . See how off topic plus more off topic we’ve gotten in the Beginners Forum ????

I really made the outrageous “is no requirement to enhance, support, etc” statement to pull it back to just one layer of off topic. The intention was to separate edge work from MM work. Also, most of us are writing without an editor on TL… and a bunch of us go for brevity in the extreme ...sometimes.

 

MM does makes a big difference in trading - not just in “many systems” or just in "systematic (and not discretionary)" systems – in ALL systems, including those way outside this topic that don’t factor in trend at all and even those that intentionally buck trend, etc. … However - (and this was also covered above)

First, a system must have positive expectancy to be an edge. No edge = no survival = out of business. To discuss how fund managers, etc. benefit from applying various MM techniques in general does nothing to clarify that or add to the topic- because each edge itself generates its own appropriate MM aspects ie you can’t just throw MM in general at trading. The correct sizing, compounding, pyramiding, scaling tricks of one system will not automatically transfer to other systems ie.. Functional MM cannot be developed independently from an individual system / edge or a 'portfolio' of edges. “mish and trade – that’s trading” at your own risk.

btw SUIYA, I’m trying to point something out to readers – not argue with you! So, noob readers, think about MM in general if you must … mish the tasks of edge development and MM development together if you like – good freakn luck :helloooo:

 

 

…

 

:haha: So would you like me (unsuccessfully for most) sum up all the MM books in the whole world??? Here goes another ‘shortism’ -

As a trader, you may survive and profit, but you will not thrive to the top top pareto in trading without cutting edge money management …

Unfortunately that one will not obviate your need to read and study the MM material, like my first “shortism’ obviated the need to read all the Covel in the world :roll eye: :rollbrains: etc

 

 

 

short story...

Engineers in a company meet to work out some details of one specific process. Because a bit of controversy is attached, some senior people show up - uninvited and unannounced, of course. After that issue is resolved, a group stays to discuss the direction the company is headed. Some see the choice as two distinct directions the company could take – functionally, etc. Others see it all as a continuum… no need for any re-vision-ing or specializing… it’s all just general business…

 

Long story short - rather than stay on the question of the two directions, the conversation is pulled increasingly to the multitude of varieties and idiosyncrasies within just one of the directions. When some of the participants attempt to steer the conversation back to the central topic of company direction, the CFO and his posse step in to try to dominate the conversation with issues aout finance … feathers are ruffled, etc. etc. … stuff… corporate stuff… business stuff…

“This is stupid” is secretly running through the minds of many… hopefully a few turn in resignations and go do their own more focused startup…

 

it’s the ongoing battle

“nothing is off topic in here. path of least resistance is how we roll”

VS

“don’t give the devil a ride, he’ll want to drive”

[SIUYA 11]

love it Zdo..... thanks for your reply....(I agree but just cant help myself sometimes)

 

I guess one romance novel is all we really need