The following is a post by Stephen Burns, who is a trend follower that specializes in the Darvas System.
Michael Covel has written an easy to read and understand book entitled “Trend Commandments: Trading for Exceptional Returns” FT Press, that condenses and explains the principles of successful trend followers.
This book is based on the author’s extensive 15-year study of the world’s top trend following traders such as Ed Seykota, Paul Tudor Jones, the Turtle Traders, Larry Hite, and many others. This is not a book filled with Mr. Covel’s opinions, as it’s direct quotes, advice, and methods of successful millionaire and billionaire traders, most of which he has interviewed in person. The author has also studied the entire history of trend following traders back to the 18th century including some more recent legends like Jesse Livermore and Richard Donchian.
What he has created is a guide book to trend trading and one of the very first books that a new trader or unprofitable trader should read if they want to learn what really works over the long term for huge profits.
I have also studied successful traders over the past six years reading over 165 trading books while also successfully trading the markets for 12 years. I have reached the same conclusions as Mr. Covel has in this book for the principles that must be used if you want to make the journey from new trader to rich trader. It is amazing how this book mirrors the 18 principles of my book.
A lot of it is counter intuitive, and many readers can not grasp some of the concepts.
Several of the principles that successful trend traders use are difficult for the general public to understand. Readers unfamiliar with systematic trend trading have a hard time grasping the concept of trading for profits with out predicting. Most successful trend traders have preset planned entries that are triggered by a new high or low price being hit. They buy or sell short in the direction of the dominant trend, they do not predict the trend… they simply follow it. Even though the trend traders studied by Mr. Covel have huge long term gains and continual growth in managed capital, some critics complain that many trend traders have large draw downs. While 20% draw downs are unpleasant to trade through, traders of all types have draw downs and many traders that trade against trends and do not manage risk blow up eventually.
Criticisms about trend trading of all types are answered in this book. In this book many sacred investment cows are slaughtered, Covel goes so far as to say that buy and hold investing is a winning strategy for mutual fund managers through fees, but not for investors, with the 2000 and 2008 bear markets wiping out gains that could have been locked in with trend trading strategies.
The book warns many times that anyone who says they can predict the stock market can not be trusted, it is delusional thinking to believe they are smarter than all the participants and can see all events that move markets ahead of time. Trend followers simply use preset price signals to identify trends, they manage their risk on every trade, and they follow their system with great discipline. As long as markets trend they will be winners in the zero sum game.
I have condensed the principles of this book into the Ten Trend Commandments.
- You shall learn from successful trend followers to make big returns int he market.
- You shall follow the trend only, and have no guru that you bow down to.
- You shall not try to predict the future in vain, but follow the current price trend.
- You shall remember the stop loss to keep your capital safe, you shall know your exit before your entry is taken.
- Follow your trend following system all the days that you are trading, so that through discipline you will be successful.
- You shall not give up on trading because of a draw down.
- You shall not change a winning system because it has had a few losing trades.
- You shall trade with the principles that have proven to work for successful traders.
- You shall keep faith in your trend following even in range bound markets, a trend will begin anew.
- You shall not covet fundamentalists valuations, CNBC talking heads, newsletter predictions, holy grails, or the false claims of black box systems.
If you want news and entertainment watch CNBC, if you want to learn how to trade read Trend Commandments.
“Investors have experienced two bear markets in the last decade. This has led to rising volatility, uncertainty, and investor angst. For some it has been a lost decade, but for trend traders it has been a decade of opportunity. Trend Commandments helps you focus on what matters most: the trend of the markets, whether up or down. You can profit from either. Trend Commandments is essential reading for those who have the desire to thrive and survive in an era of fast-paced trending markets.”
CEO, Chief Investment Strategist, PFS Group
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