Trend Following - Book Summary, Chapters & Review

 

Introduction to Trend Following

Trend Following by Michael Covel is a comprehensive guide to the investment strategy known as trend following, which is based on the principle of following the direction of market trends rather than attempting to predict them. Covel delves deep into the philosophy, history, and practical applications of this strategy, providing readers with the tools needed to succeed in the markets by identifying trends and riding them for profit.

The book highlights that trend following is not about forecasting or predicting market movements, but about identifying patterns in price movements and making decisions based on those patterns. Covel also addresses the psychology of trend followers, the role of risk management, and the importance of discipline in maintaining a long-term profitable strategy. Through interviews with successful trend followers and insights from the world of finance, Trend Following provides a compelling argument for why this strategy is one of the most effective approaches to trading and investing.

Trend Following - Book Summary

• Written by Michael Covel, a renowned expert in trend following and financial markets.
• Explains the principles and concepts behind the trend-following investment strategy.
• Provides a detailed analysis of how successful traders use trend following to profit in financial markets.
• Focuses on the psychology of traders and the discipline required to follow trends effectively.
• Discusses the importance of risk management and how to avoid emotional trading decisions.
• Emphasizes long-term strategies rather than short-term speculation.
• Features real-world examples and case studies from successful trend followers.
• Aimed at both beginner and experienced traders interested in building a trend-following approach to investing.

Trend Following - About the Book

Trend Following is not just a guide to a trading strategy, but also a mindset. Michael Covel teaches readers that success in the financial markets is less about trying to predict the future and more about observing the current market conditions and making decisions based on what the market is doing at the moment. The book advocates for a mechanical approach to trading, removing emotions from the decision-making process and focusing purely on the trends.

The author uses a wide range of examples from historical market data and interviews with successful trend followers to showcase how this strategy has been successfully applied over the years. It explores the psychological aspects of trading and how fear, greed, and emotional decisions can lead to failure. The book emphasizes the importance of patience, discipline, and the willingness to take calculated risks when engaging in trend following. Covel's insights help traders understand that by following established trends, they can consistently make profits, even in volatile and unpredictable markets.

List of Chapters

1. The Trend Following Strategy
2. The Trend Following Mindset
3. Risk Management and Discipline
4. The Role of Emotions in Trading
5. The Psychological Battle
6. Successful Trend Followers
7. Technical Tools for Trend Following
8. Identifying and Following Trends
9. Case Studies of Trend Following Success
10. Building Your Trend Following System
11. The Long-Term Perspective
12. Common Pitfalls and How to Avoid Them
13. The Future of Trend Following

Summary of Each Chapter

1. The Trend Following Strategy: Introduces the concept of trend following, explaining its core principles and the reasons it works in the financial markets.
   Example: Covel outlines how traders can profit by following the direction of market trends without needing to predict or forecast the market.

2. The Trend Following Mindset: Focuses on the psychology required for trend following, stressing the importance of patience, discipline, and emotional control.
   Example: Covel describes how successful trend followers embrace uncertainty and avoid making impulsive decisions based on fear or greed.

3. Risk Management and Discipline: Discusses the crucial role of risk management in trend following, explaining how traders can protect themselves from significant losses while staying in profitable trades.
   Example: Covel explains the importance of setting stop-loss orders and maintaining proper position sizing to manage risk.

4. The Role of Emotions in Trading: This chapter highlights how emotions like fear and greed can negatively impact trading decisions and how trend followers mitigate these emotions.
   Example: Covel shares how fear of missing out (FOMO) or overconfidence can lead to poor trading decisions, and how trend following helps avoid such emotional traps.

5. The Psychological Battle: Explores the mental challenges of trend following and how traders can stay disciplined in the face of market fluctuations.
   Example: Covel shares stories of traders who have succeeded by following their system, even during market downturns or when the trends are unclear.

6. Successful Trend Followers: Provides profiles and case studies of well-known successful trend followers, showing how they implemented trend-following strategies.
   Example: Covel discusses traders like Richard Dennis and Ed Seykota, who made fortunes by using trend-following techniques.

7. Technical Tools for Trend Following: Introduces various tools and technical indicators that trend followers use to identify and confirm trends.
   Example: Covel explains how moving averages and breakout systems are essential in identifying when to enter or exit a trade.

8. Identifying and Following Trends: Covers the methods used to identify market trends, including both short-term and long-term trends, and how to ride them for profit.
   Example: Covel provides examples of how trend followers spot trends early and enter trades when the trend is strong.

9. Case Studies of Trend Following Success: Features several case studies from successful traders who have applied trend-following strategies in different market conditions.
   Example: Covel highlights how trend followers profited during the 2008 financial crisis by sticking to their system and avoiding market speculation.

10. Building Your Trend Following System: Guides readers through the process of developing a personalized trend-following strategy, emphasizing system development and backtesting.
    Example: Covel advises readers to create a mechanical system that can be followed consistently, removing emotional decision-making from trading.

11. The Long-Term Perspective: Focuses on the importance of a long-term outlook in trend following, where the focus is on steady, consistent returns rather than short-term gains.
    Example: Covel explains how traders who adopt a long-term view are better equipped to handle market volatility.

12. Common Pitfalls and How to Avoid Them: Identifies common mistakes that traders make, such as chasing trends or neglecting risk management, and offers advice on avoiding them.
    Example: Covel highlights the danger of overtrading and the importance of sticking to your system even when the market is volatile.

13. The Future of Trend Following: Concludes by discussing the future of trend following in the context of modern markets and technology.
    Example: Covel suggests that with the rise of algorithmic trading, trend following will continue to evolve and remain an essential strategy in the financial world.

Where to Buy the Book

• Amazon
• Barnes & Noble
• Book Depository
• Walmart
• Target

Conclusion

Trend Following by Michael Covel offers invaluable insights into one of the most powerful and successful trading strategies. The book emphasizes the importance of following market trends rather than trying to predict them, focusing on the disciplines of patience, risk management, and emotional control. Covel provides a detailed roadmap for both novice and experienced traders to build their trend-following systems, backed by case studies and real-world examples of success. Whether you are an aspiring trader or an experienced investor looking to refine your strategy, this book offers essential lessons on how to profit in the ever-changing financial markets.