Michael Covel: Trend Following

Michael Covel is an author and seller of trend following trading systems for individual traders. I borrowed this book at the public library, I enjoyed reading it but it is optimized for motivation and engagement rather than conveying actual information.

Michael Covel Image credit: wikicommons

• He mainly gives life-advice and motivation talks about agency and self-reliance, this corresponds to the first edition of the book, which is about 300 pages.
• After that, there are 300 pages of podcast transcripts and articles, followed by a list of the hundreds of podcast he recorded without context or abstract
• He interviewed Nobel Prize Harry Markowitz early in his podcast. After that, he could invite and interview many other Nobel Prize winners, and had access to successful trend follower traders such as Ed Seykota,
• He interviewed successful of the top 10 momentum traders and CTA, but the interviews were done after the traders have had their successful run. This begs a question of survivorship bias that is never addressed. Only Seykota points to testing his ideas rather than applying a recipe.
• He does not disclose his own track record as a trader, despite being in this trend following gig for more than 20 years
• He is a former GMU (George Mason University) graduate living in Thailand, he has a libertarian bend. He lumps together MPT (Modern Portfolio Theory), EMH (Efficient Market Hypothesis), and the Welfare State.
• He claims that Sharpe ratios are a useless metric because trend following PNL is skewed, and yet he finds that the average return is a useful metric. He does not discuss the use of volatility for position sizing.
• The technical content of the book can be summarized to the following: a trading strategy has entry signals, position sizing, and exit signals. He does not describe ATR or volatility.

Some podcast transcripts are instructive. An interesting episode is that Ed Seykota explains that as an intern, he met Mr Donchian who was working for a broker to propose trading signals for clients. Donchian had the idea of running maximum signals but never systematically tested his strategy. When Ed used the massive computer center of the broker to run simulations, he found a strategy based on running maximum that worked.

The interesting part was that there was an immediate conflict of interest, as the strategy generated more profits but annual or less trading signals and therefore less commission for the broker. Ed could not work for a broker due to the misalignment.

The articles are generally more informative than the book, although they look more like marketing than methodology:

• A Multicentenial View of Trend Following
• Two Centruries of Trend Following by Y. Lempérière, C. Deremble, P. Seager, M. Potters, J. P. Bouchaud 2014, monthly signal on $s_t=\frac{P_t-Ewm(5)}{\sigma(5)}$ where $\sigma(5)$ is the ewma of absolute price move. Sharpe ratio of 0.8.
• Trend Following, Quality not Quantity Anthony Todd, Martin Lueck, 2016. Evaluates 13 trend following strategies on 146 asset vs their current one. They all have roughly 1 sharpe ratio. There is no diversification benefit mixing trend follow strategy. The paper does not specify sharpe ratio by strategy, trading costs, trading frequency, or compare theoretical results with their actual.
• Evaluating Trading Strategies Campbell Harvery and Yan Liu, 2014, for a single test, $t-stat = SR x \sqrt{nb years}$ the best test out of $n$ sees its t-stat divided by $n$ according to the Bonferroni correction. Authors suggest using BHY correction to ensure p-values are significant.
• Black Box Trend Following - Lifting the Veil Nigol Koulajian Paul Czkwianianc 2010. Point out at crossover strategies from 10-100 to 10-200 all outperform big CTA, but the latter use the longer lookback to reduce trading frequency. The shorter lookback periods allow for smaller drawdowns.
• Risk Management Ed Seykota 2005. Quotes Kelly and otherwise advises MC for position sizing.