Trend Following: by Michael W. Covel

Trend Following: by Michael W. Covel
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Trend Following by Michael W. Covel is a comprehensive exploration of a powerful trading strategy based on riding market trends rather than trying to predict them. Covel presents trend following as a systematic, rules-based approach to trading that focuses on price movements rather than news, fundamentals, or market sentiment. The book combines theory, history, case studies, and practical advice, making it both an educational and motivational resource for traders and investors.

At its core, trend following is simple: buy when prices are rising and sell (or short) when prices are falling. Covel argues that markets move in trends because of the collective behavior of market participants — emotions like fear, greed, and herd mentality drive prices far beyond what fundamentals might suggest. Instead of trying to forecast when a trend will start or end, trend followers use specific entry and exit rules to catch and ride the trends once they become apparent.

Covel stresses that price is the ultimate truth in the markets. Indicators like earnings reports, economic news, or analyst opinions are secondary. By focusing purely on price action, trend followers eliminate much of the noise that misleads other traders. They accept that predicting the future is impossible and instead react to what is happening now, aligning themselves with the market's momentum.

A major theme of the book is discipline. Covel shows that successful trend followers stick to their systems no matter what, especially during drawdowns when it becomes emotionally difficult to continue. Losses are inevitable, but the key is to keep them small and allow winning trades to grow. This approach hinges heavily on risk management — trend followers use techniques like position sizing, stop-loss orders, and diversification to protect their capital.

Throughout the book, Covel highlights the stories of famous trend-following traders such as Richard Dennis, the Turtle Traders, and Bill Dunn. These case studies demonstrate that trend following can work across different markets — stocks, currencies, commodities, and futures — and over long periods. The examples also show that massive fortunes have been built using these principles, even though the strategy often runs counter to popular investing advice.

Covel also debunks several myths about investing, such as the idea that markets are efficient or that buy-and-hold investing is always the best strategy. He challenges readers to think differently about risk and reward, showing that volatility is not necessarily something to fear but something to manage and even capitalize on.

Importantly, Trend Following is not a technical manual. While it discusses general systems and rules, it does not provide a single "magic" formula. Instead, Covel emphasizes the mindset and principles necessary for success. Readers are encouraged to build or adapt their own rules to suit their risk tolerance and objectives, always anchored by the basic trend-following philosophy.

In conclusion,
Trend Following advocates for a pragmatic, disciplined approach to trading that removes emotions and focuses purely on market realities. By embracing uncertainty and managing risk intelligently, traders can capture the big moves that lead to outsized profits over time. Covel’s book remains a must-read for anyone serious about understanding how successful traders think and operate.

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