Just when you may have started to believe it was safe to fade or dollar average a losing position, Mike Covel provides big reasons not to in his latest must read trading book “The Little Book of Trading: Trend Following Strategy for Big Winnings” by Wiley publishing. If I am truly honest, I have to admit I opened this book up with high expectations. I own other books written by Mike Covel including “The Complete Turtle Trader” and “Trend Following.” After all, I have read “turtle” and “trend” cover to cover more than once and most trading books I don’t even complete once.
Covel is able to articulate the emotions, trials, triumphs and most importantly the land minds waiting to blow up trading accounts. Covel’s rare genius of the pen is undoubtedly what many other authors hope to achieve when developing trading improvement books. In the little book, Covel brings the wisdom of many great traders and in a way that doesn’t require three solid days of reading. I picked up and read a chapter here and there and before I knew it, the book was done and I was finding myself reading again the pages I dog-eared (and I have a lot of pages marked). It’s hard to miss when you have names like Ed Seykota (one of the greatest traders ever on many levels), Larry Hite, Kevin Bruce, and many others. The biggest downside of The Little Book Of Trading is it ends near the 200 page mark. I would have been more than happy to keep reading upon reaching the last page. As someone who reads stock articles for hours a day, I really connected with the chapter titled “Stories Don’t Make You Money”, and I have to fully agree. Most of what I read is simply worthless at best, but at least normally transparent in their motivation. Covel writes “…And the demand is there. People want to understand so badly, and stories help to rationalize. It’s comfort food for the financial soul”, and this is so dead on. I have written negative articles about several stocks on seeking alpha causing a wave of angry comments that included all the reasons they read why “it was going to keep going up”, or “keep going down.” I have largely given up trying to explain everything they know is priced in and once the emotion leaves (think lady luck) as it always does, rational pricing takes over.
Covel wrote in chapter 5 titled “Think Like A Poker Player And Play The Odds” and this chapter alone has more required information than many complete books in regards to the mental aptitude, fortitude, and preparation required to succeed in the markets. “
If you’re playing a positive expectation game, you don’t want to be knocked out. Good stuff always takes care of itself, but you have to stay alive. You can’t play if you’re dead.” This is such an important point, and I see the KIA’s of the trading battlefield all the time. I have been in the same chat room for almost every trading day for the past four years and on a regular basis for about 10 years. The warning signs are everywhere and usually the same. Traders put up large numbers, both winners and losers relative to their account. Then, like clockwork, a big fast moving stock captures everyone’s attention (not just the chat room but usually all of Wall St.) and the only sound before the explosion is the click of a keyboard. Unlike real KIA’s, many of the trading blow ups actually speak afterward. The focus on how much can be made instead of how much they can lose is the driving forces of every trading account implosion. Covel says it so well with the fact that even if you know ahead of time what an investment will do, it’s not enough information to maximize the return on investment. If you leverage up to far, you likely to get killed as the market zigzags its way to the ultimate price.
Timing is also vital and Covel covers this topic splendidly with tactics that do NOT include using judgment calls while in a trade. In a nutshell, when you are truly trend trading, you are always exiting when a trade is moving against you, and never trying to guess when the price is “too high / too low” or “has to come back some.” What really gives this “little book” and trend trading in general is greatest power is the ability to formulate a road map and plan of attack, which removes the thinking while in the trade. Removing the decision making while in “the fog of war” allows the trader to focus on becoming better instead of trying to predict the future.
I opened up Michael Covel’s latest book with high expectations, and once again I have finished reading regenerated and mentally more prepared to start my trading day tomorrow. Interestingly enough, I am not a trend follower, not at least in the sense of what most consider trend following. Nonetheless I gained a great deal of value by reading the book and so I am very confident you will also. Get a copy of this book, its mandatory reading if you want to know as much as you can about trading. You will very quickly understand why I say you don’t buy a Covel book; you invest in your trading knowledge.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.