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Michael Covel Interview PDF

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Michael Covel Interview PDF

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Dhaval
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Michael Covel Price Is the Best Indicator in the World ‘ong time readers of TRADERS’ will remember that as early as the March issue of 2006, we published an interview ‘with Michael Covel that was devoted entirely to the subject of tend following. Mare than eight years have passed since then, during which time a lot has changed. That is why we are publishing a second interview where we will be showing new aspects of Michael Covel’ trading ohilosophy. The world has moved on for him, too, end he has been able to learn some exciting reading. many new things, Marko Graenitz interviewed him in early May, and you can look forward doing a lot of travelling in the process. And somehow | got stuck there, Itis now one of my goals to spread trend, following in regions across Asia, In the US, the concept Covel: Good evening. | am currently in Ho Chi Minh City, has long been known, but can see there is some catching Vietnam, where itis 10 pm now. up to do here in Asia Covel: In 2013, | gave 40 plus presentations for various Covel: The basic approach is that nothing is predictable. funds in China, Japan, Singapore, Malaysia and Vietnam, | will reiterate because this is absolutely crucial and it is 72 regularly disregardedby most market participants: There is absolutely nothing thet can be predicted! ‘TRADERS’: This is indeed in contrast OPTIONAL to ll we are offered every day on the ‘stock market. Covel: And for a good reason: Alot of, people make money by claiming that they can predict something. ownsge pra ‘TRADERS':Is that a claim false even for long term predictions? Say in terms of several years? Covel: Yes, even for th atthe last 20 years. The market kept | going up and down all the time. How. Just look the hell is anyone supposed to have predicted that ahead of time? Anyone claiming that is a liar, Reality is so complex that no one can tell what is going to happen in a few years’ time, ‘TRADERS If trend following defies prognostication, how does it work then? It works by way of the price, “the best indicator in the world”. Ifthe price of any stock goes up, then that, is a clear indication of market participants willing to buy at higher prices. Analogously, this is true of prices falling. All of this ig based on the idea of a pro-cyclical momentum or trend: If something goes up (or downl, it will ikely continue to go up (or down}. Covel TRADERS’: Aren't you oversimplifying things alittle bit here? How do you know these trends exist, ifforecasts are impossible? Covel: This is what the stats tell us. And they are pretty reliable. You see, studies have shown that there have always. been trends in the markets — in fact for more than 100, 200, and 800 years {across three studies. | think that is a pretty valid basis for a trading strategy. But if investors proceed classically by using a buy-and-hold strategy, which on closer inspection is no real strategy at sll, they need to cope with significant drawdowns when the markets tumble. A good rend following strategy, however, will benefit from bear ‘markets by using short positions to bet on downward trends. ‘TRADERS’: Still, there are many sideways phases and ic movements, in which case a trend following strategy can make losses over a longer period oft y ‘seinen by taling stoptoss frders behind te make. PEOPLE Fi) Let Your Profits Run, Cut Your Losses Short AR suvoronsjaurioses310ns the vale ofa Optanis sven yh law probably, igh pave terms inthe sunmaton ‘RUN PROFITS: he ts we (CUTLOSSES: we tunes te entry prottaberades at pe soned an nar than eh premature obecives. exIF PRICE 8Y CONTRAST, numerous suies have ‘onelued that investors yi exhic fagernes to redse gains and luctance te npalse losses te ispostion eet ‘The sraphic shows the basic da of ton folbwig. By cut losses short and ting pros rn, an symm pyot rte wll velop over h lng er ith sal ses and poisthatae few n-nber tutraeh baer amagase This eared to 3 opt ay, Covel: Yes, sure. Like any other strategy, this one also includes certain drawdown phases caused by many losses accumulating when there are no clear trends in the markets, Historically, however, such phases are of a temporary nature. Surviving drawdowns as well as you cean requires good risk management and building up a smart portt current trends, compensating for the small losses that some of which will always be following ‘occur as a result of false signals, TRADERS’ If trend following works so well, why is the strategy used by so few market participants? Covel: For along time the consensus among academics was that the markets were efficient and profits made by using simple trend-following strategies were more {2 product of chance than anything else. Meanwhile, the mindset of sademics has changed. Increasingly, academic studies are being published that show that trend following works. The problem is the “experts” in the financial industry cannot sell this approach as well because people would much rather hear predictions backed by great fundamental analysis and projections. Such “stories” will appeal to investors more than a statement saying to just follow the trend. ‘TRADERS’: What does your own trading style look like — is there anything you can let us know about that? 73 PEOPLE £2) Trend-Following Trade Scheme Trend Peaks ‘rend Stat Fine 2 shone single stem inating what yl ansallawing vader Tea He. he case of an upward rnd entry i mace sgieary ate than the atllo pisthen ered direction ceemedtste cnirnns tse co the especie citer moving average eakoat ote Ue. Sia xt wwllnotbn mas te rangi consees ta hoe endeared an he sone simian cepenng on re exact uae mg step. As aos, one fallowgraders uti the “enrepce othe cirallmevenen. Sine no trang overcae erect onthe lw arin cle xy ot le sia) swibasically caus sss to occur bt hese wb insert sal han dey prot tat ar mae when yourrades ae sucess water encam Covel: | use trend following when trading futures and ETFs. In order to achieve a good diversification of risk, | se a basket of various markets and asset classes. |keop entries and exits simple, for example, long term moving averages (MAs) such as the 100-day MA and in the case of exits sometimes on the basis of slightly less long term MAs. Breakouts above or below certain levels may also trigger an entry or exit. My rules are such that they are precisely defined, so I make no discretionary decisions, but always know exactly what to do. ‘TRADERS’: How did you make these rules? Covel The whole strategy is based on extensive backtests. have programmers testing the ideas for me, TRADERS: What time frame do you trade in? Covel: My investment horizon is long term, beceu the end it is there that the large: addition, you can enjoy a much better quality of life when you are a long term trader. A lot of short term traders ‘will dream of enjoying great freedom, but then spend the entire day sitting slavishly in front of the screen. Besides, ‘the more short term your time horizon is, the more difficult things tend to become: The general level of stress will increase, you will need to watch your trades There are several ways of implementing a trencfollowing strategy. Basically, the 'TOr® often, and the impact of strategy goes long in markets that have gore up, and short in markets that have sigoritnmic high frequency trading gone down (so-called "Time-Series Momentum’). Specifically, itis in particular ‘8 also increasing. | know that many the exact parameters that can be varied individually. Since some graphics on the traders will find trend-following following pages show the simulation results of AOR Capital, we would like to Wise, but then want to “optimise” Use that as an example to explain their rendollow'ng approsch.The investment better entries, better exits, and so Universe comprises 2 total of 59 markets from four cifferent asset classes: 24 commesities, eleven equity indices, 18 bond markets, and nine currency pairs. Based on these data, three trend-fllowing strategies were simulated where trade direction long or short) was selected on the basis of returns achieved over periods of one, three and twelve months. This will be ilustrated by the following two examples: When rarket hed been up over the last three months, a long position was opened as part of the S-month strategy. If a market had been down over the past twelve months, a short position was opened in the 12-month strategy. From the three strategies an equally weighted combination was calculated on a monthly basis. This was ‘then adjusted in such e way that the overall portfolio had an annual volatility of ton per cont (hereinatter referred to as “irend-ollowing strategy"). Adjusting the volatility ensures that the risk incurred by the strategy will remain constant over time — regardless of haw many markets were tradable at each point in time in the backtest. The period of time studied ranges from 1903 to 2012 with those times when some markets were not available being simulated by each of the remaining number of markets. fon. However, this will only work to a certain degree without destroying the basic idea. Strategies should be evaluated at most on a daily basis, for even better on @ weekly basis = no intraday trading. Experience suggests that the latter, weekly signals, works best TRADERS’: What are the essential standards that traders should adh to when oreating a trend-following trading strategy? Covel: There are numerous ways of implementing a trend-following strategy, 0 every trader or investor needs to find their own crit depending onthe time horizon chosen, 14 their backtest results, and their personal preferences. However, the basic conceptis always the same (Figure 1 and 2) In the final analysis, the process of devising a strategy starts with five questions, which to some extent represent the basis fora trend trading approach Which markets are traded? What are the position sizes? Where will the entry be made? When will the exit be made in case of loss? When will the exit be made in the event of a profit? ‘TRADERS :Do you look at charts? Covel: Look at them | do, but charts should not be overestimated, You use the price to trade, and that means sheer numbers, not the chart, You do not need charts to trade, but people love them nonetheless. ‘TRADERS’: Have you ever thought about start fund? Covel: | have indeed, but so far | am comfortable with my success. At some point, there may be the proper your own, constellation of stars aligning where the general conditions are right. But managing @ fund definitely has its drawbacks, too. You need to meet regulatory requirements, take care of a lot of paperwork, look after customers, and s0 on and so forth. It is especially the customers and the fee structure that can bring a lot of pressure to bear on the manager. And ifthe fund does not, collect enough money, the project may soon turn into a loss-making bureaucratic nightmare ‘TRADERS’: How did you actually become aware of the trend-following idea yourself? Covel: That was in 1994 when Iread about the turtle trader Jerry Parker in a magazine, He had made $30 million in fone year, which made me curious, of course, | was not only driven by the prospect of large sums of money, but, rather by the question of how he had acquired the skill required to achieve such a feat. | found it fascinating that it was apparently possible to learn how to trade, Before that, Lused to think that, ike Warren Buffett, | would first have to master “value”, work at Goldman Sachs and trade con the basis of fundamental. ‘TRADERS’: What ges that trend-following investors have over those who trade on the basis of fundamentals? Covel: The difference is quite simple. As a trend e the advar follower | can say: “I can do that. These are the rules PEOPLE Ti) Trend-Following Backtest as 1 dn 183 Des 102 Tix org e875 Dee 852 1% 13%

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