Book Review of Trend Following: How to Make a Fortune in Bull, Bear, and Black Swan Markets by Michael Covel (Wiley Trading) 5th Edition
Michael Covel's Trend Following presents a systematic approach to investing that relies on identifying and riding price trends rather than predicting market directions. Covel argues that a disciplined trend-following strategy, which avoids traditional forecasting, can yield robust returns across varying market conditions, including crises and unpredictable "black swan" events. This edition expands on prior versions by including interviews with successful trend-following traders and data-backed evidence showing the historical success of trend following.
The book delves into the psychology, risk management, and decision-making frameworks necessary for effective trend following. Covel advocates for an evidence-based, rules-oriented approach that prioritizes systematic responses to price movements over emotional reactions. By using trend-following techniques, Covel explains that investors can capture substantial upside potential while limiting downside risks, aligning closely with the pursuit of asymmetry in investment returns. The fifth edition remains a comprehensive resource for investment managers and traders interested in achieving positive asymmetry by adhering to the discipline of trend following.
Chapter Reviews
1. Trend Following
Covel introduces the philosophy and principles of trend following, contrasting speculation with systematic approaches. He emphasizes a reliance on data-driven rules over predictions, summarizing the mindset needed to “follow the trend to the end when it bends.”
2. Great Trend Followers
This chapter profiles prominent trend followers like David Harding, Bill Dunn, and Ed Seykota. Each case study shows how disciplined trend following enables them to consistently achieve asymmetric returns by staying with trends and avoiding market noise.
3. Performance Proof
Covel presents data on absolute returns, volatility, drawdowns, and correlations. By dissecting real-world examples, he illustrates how trend following achieves positive asymmetry, which is essential for those seeking asymmetric returns.
4. Big Events, Crashes, and Panics
Analyzing market shocks like the Great Recession, Covel explains how trend-following strategies can withstand and even capitalize on these events. This chapter highlights the adaptability of trend following and its potential for substantial gains in volatile conditions.
5. Thinking Outside the Box
Covel compares trend following to unconventional approaches in other fields, such as Billy Beane’s use of statistics in baseball. He suggests that innovative thinking, combined with rules-based strategies, can lead to substantial returns.
6. Human Behavior
The focus here is on behavioral finance, explaining how emotions like fear and greed impact decision-making. Covel underscores that trend-following strategies help mitigate these biases, enabling investors to pursue asymmetric returns more effectively.
7. Decision Making
Exploring decision-making processes, Covel introduces concepts like Occam’s Razor and fast, frugal decision-making. These tools provide a streamlined approach for managers to keep their strategy simple yet effective.
8. Your Trading System
This chapter serves as a guide to developing a personal trading system, emphasizing adaptability and systematic processes. Covel provides actionable steps to create a system that aligns with trend-following principles.
9. Trading Systems
Covel compares different trading systems, explaining how each approach applies to various markets and asset classes. This chapter provides essential insights for managers evaluating or refining their trend-following systems.
10. The Game
Covel considers the market as a game that requires skill and discipline. He reinforces that trend following is a means to “play” this game methodically, protecting capital while seizing asymmetrical opportunities.
11. Trend Following Interviews
The fifth edition includes interviews with renowned traders like Ed Seykota, Martin Lueck, and Jean-Philippe Bouchaud. Their insights offer practical perspectives on implementing trend following to achieve asymmetric returns.
12. Trend Following Research
Covel presents historical data to back trend-following performance over the centuries. From return characteristics to portfolio benefits, he details how trend following has historically provided positive asymmetry, reinforcing the book’s core thesis.
13. Evaluating Trading Strategies
In this technical chapter, Covel discusses metrics like Sharpe ratios and the importance of backtesting. He also addresses potential biases in evaluating strategies, guiding readers on assessing risk-adjusted returns accurately.
14. Black Box Trend Following
Covel demystifies algorithmic, “black box” trend-following models, showing how transparency and systematic rules provide reliability. He explains how these models help managers pursue asymmetric returns by eliminating emotional biases from trading.
Insights for Asymmetric Return-Focused Managers
Covel’s book stands out by offering a clear, step-by-step guide to implementing a systematic trend-following approach for those seeking asymmetric returns. By focusing on risk management, consistent rule application, and data-driven decisions, Trend Following provides a solid foundation for creating positive risk/return asymmetry, especially in volatile markets. Each chapter serves as a reminder that the pursuit of asymmetry in returns requires both discipline and an understanding of market behavior.
This comprehensive guide remains a key resource for investment managers, reinforcing that a disciplined, data-driven approach can yield strong returns across diverse market conditions. Covel’s fifth edition reaffirms that trend following is as much about controlling downside as it is about capturing upside, making it an essential read for those committed to asymmetric investing.