Frequently Asked Questions

Market Lab Report
Covel's trend following traders favor mechanical black box over your overall method. Can you comment?

Q: I have read a few books from your book list: Darvas, Boik, Livermore and Covel. The first 3 reinforce many of the ideas from you and O'Neil. What a rich heritage that you share with the past market winners! The traders in Covel's Trend Following are different. They favor technical and mechanical black box over the fundamental and discretionary, which you utilize extensively in stock selection and positioning. (Their historical performances are not all that impressive, compared to yours.) Am I missing the point? What did you take away from Covel?


A: With respect to Covel's book, we enjoyed knowing that purely mechanical trend following systems applied to markets work over most market cycles and in entirely different eras because markets like to trend, and the gains made during trending environments more than make up for the small losses had during non-trending environments. We also enjoyed knowing that the reason our returns are superior is because we apply right brained thinking to the left brained analytics. Just as using both fundamentals and technicals are better than just using one or the other, using both left and right brain are better than just using one "side" of the brain.

That said, the Market Direction Model is systematic, but any new rules that are applied to the model are born from right brained thinking. Such rules are very rarely added to the model, but are a reflection of something material that has changed in the markets, such as quantitative easing that started in March 2009 and should carry on through at least June 2011.

Published: Apr 5 2011