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How to make money in any type of stock market
Title: Trend Following: How to Make a Fortune in Bull, Bear, and Black Swan Markets
Author: Michael W. Covel
WHO IT’S FOR: Investors
MORE SPECIFICALLY: DIY investors looking for a strategy to help them structure their active trading.
IS THERE A STRATEGY?: Yes, a backward-looking theory of stock tracking—and a type of momentum investing—that focuses on where the stock price has been as an indication of where that price will be in the future. It uses charts, graphs, and first-hand investor accounts that markets do, to show that markets do in fact, follow trends. And if you can identify the trend, you can, in fact, follow it and likely make some money.
WHY WE LIKE IT?: A must read for anyone who wants to better understand how to profit from the financial markets using systematic and unbiased approaches. Such a strategy will reward disciplined investors with a long-run time horizon. The book is thorough and includes the history of the trend following method, the strategy rules, the emotions needed to stick to it and the legendary money makers who plied their trade for decades.
WHY ELSE WE LIKE IT: Lots of reasons. All the extras—several interviews and research articles on investing are included in the book. Especially the introduction by the reknowned investment advisor and columnist Barry Ritholtz, a longtime believer in buy and hold investing strategies. Yet this is a book decidedly not on buy and hold strategies, so that’s interesting. Lots of best practice tips and quotes on the margins of every page from famous people like value investor Warren Buffett, inventor Galileo Galilei, Irish writer Oscar Wilde and journalist Malcolm Gladwell (as well as hundreds more.)
IF YOU CAN ONLY READ ONE CHAPTER: Make it Chapter 4 – ‘Big Events, Crashes, and Panics’, which discusses such incidents as Enron, the great recession, the dot.com bubble, and Black Friday. Believe it or not, money was still being made during those times. Still, if you’re interested in the meat and potatoes of this trading strategy, then try Chapter 10 –‘Trading systems.’
WHAT NOT TO EXPECT: A definitive algorithm or trading methodology of what works and doesn’t work in the market. You’ll be disappointed.
SURPRISING FACT: People who aren’t interested in managing other people’s money are often more passionate about finding the right trading system for themselves so they can grow their money on their own. With a little interest, you can find a trading system that fits your own mindset. Trend followers are traders—not investors. They are systemic—removing emotion earnings reports, etc. All that matters is price. Price is the final determinant of a buy or sell position.
INSIGHTS. Volatility doesn’t equal risk for the trend follower. The idea is simple. Prices of traded securities tend to trend. They keep rising over weeks and months, and then reverse and keep falling. Identifying these trends with technical formulas. The end game? Exiting when you think the trend signals are wrong. But if the trend works out to be sustainable through your system signals, continue to ride it to greater wealth.
KEY TAKEAWAY: Human behaviour can sabotage returns and trend following systems can overcome that. As investor Bill Dunn, the founder and chairman of Dunn Capital Management—a firm that made 50% returns in 2002 when the majority of investors were losing big from the dot.com collapse—said, “We don’t need predictions. We just ride the bucking bronco.” Let prices be your guide and you’ll make money.