Trading Techniques  |  FEB 2007

Follow That Trend by Michael Covel and Justin Vandergrift

Stocks & Commodities V. 25:2 (32-36): Follow That Trend by Michael Covel and Justin Vandergrift Even if you are a trend-follower, you still have to be a systematic trader. Here’s why you still have to manage drawdowns when the market is not trending. As so often happens, it’s not the answer that is wrong, but the question. People ask me how long trend-following trading will last. Well, there is no reason trend-following should ever stop. Only if markets were to go sideways forever would trends cease to exist and therefore trend-following cease to work. Trend-following traders respond to what is happening in the market rather than anticipating what will happen. They are aggressively reactive in that they avoid forecasting and prediction at all costs. They base their trading decisions on one piece of core information: the market price. Most traders, on the other hand, want news. They want CNBC, The Wall Street Journal, crop reports, OPEC rumors, and daily doses of Mad Money with Jim Cramer. Why? Because they believe deep down that all of the “stories” and “data” will help them make profitable trading decisions. For trend-followers, all (and we do mean all) fundamental data is like white noise. It doesn’t matter if the market goes up or down because trend-followers only care about price action. Think about it: What else can you really believe in besides the market price? Or, to quote famed trader John W. Henry: “The greatest action, the wisest, the best action that you can take in almost any situation is to stay with what is, instead of jumping to conclusions or trying to come up with conclusions. Just pay attention to what is.”

by Michael Covel and Justin Vandergrift