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Trend Commandments: Trading for Exceptional Returns

by Michael W. Covel (2011)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Trend Commandments: Trading for Exceptional Returns

Author: Michael W. Covel | Categories: Trend Following, Trading Philosophy, Trading Psychology

Executive Summary

"Trend Commandments" by Michael W. Covel, published in 2011, is a passionate, irreverent manifesto for trend following as an investment philosophy. Covel, the foremost popularizer of trend following and author of "Trend Following" and "The Complete TurtleTrader," distills the core principles of trend following into short, punchy chapters that challenge conventional investment wisdom and make the case for systematic, rules-based trend following as the most robust approach to trading.

The book is organized as a series of brief, standalone chapters -- almost meditations -- on what it means to follow trends, why most investors fail, and why trend following works when everything else does not. Covel draws on the track records of legendary trend followers like John W. Henry, Ed Seykota, Bill Dunn, and the Turtle Traders to support his arguments.

Core Thesis & Arguments

Covel's thesis is that trend following -- buying markets that are going up and selling markets that are going down, with strict risk management -- is the most reliable path to long-term trading success. He argues against buy-and-hold, fundamental analysis, market prediction, and the entire apparatus of conventional finance. His core contention is that you do not need to predict where markets will go; you only need to react to what they are doing. The price is the only source of truth, and profits come from riding trends, not from forecasting them.

Chapter-by-Chapter Analysis

The book is structured as a series of short commandments/chapters rather than a traditional linear narrative. Key themes include:

  • Price is Truth: All information is reflected in price; fundamental analysis adds nothing.
  • Let Profits Run, Cut Losses Short: The asymmetric risk management that defines trend following.
  • Trade All Markets: Diversification across asset classes is essential for capturing trends wherever they occur.
  • Follow the Process, Not the Outcome: Good trading is about making good decisions, not about individual trade results.
  • Embrace Uncertainty: Trend followers accept that they will have many small losses for occasional large wins.
  • Question Everything: Challenge assumptions about markets, economics, and what constitutes "investing."

Key Concepts & Frameworks

  • Trend Following: Systematic, rules-based approach to trading in the direction of established trends across all markets.
  • Asymmetric Returns: Small, frequent losses offset by occasional large winners that more than compensate.
  • Process Over Outcome: Judging trading by the quality of the process, not individual results.
  • Crisis Alpha: Trend following's documented ability to produce profits during market crises and panics.
  • Price Action Only: Rejection of fundamental analysis in favor of pure price-based decision making.

Practical Trading Applications

  1. Trade the trend in any market -- do not try to predict reversals or pick tops and bottoms.
  2. Cut losses quickly and let winners run -- this asymmetry is the source of all profit.
  3. Diversify across many markets and asset classes to capture trends wherever they appear.
  4. Follow your system rules without exception, especially when it feels uncomfortable.
  5. Accept that most trades will be small losers; the occasional big winner pays for all of them.

Critical Assessment

Strengths: Compelling case for trend following backed by decades of track records. Entertaining, provocative writing style. Challenges readers to think independently. Short, digestible chapters.

Weaknesses: Can be repetitive and preachy. Dismisses fundamental analysis too broadly. The book's confrontational tone may alienate readers who could benefit from its message. Light on specific strategy details.

Best for: Traders and investors who want a philosophical foundation for trend following and the conviction to stick with it during inevitable drawdowns.

Key Quotes

"You do not have to know what the market will do tomorrow. You only have to know what you will do."

"Trend following is not prediction. It is reaction. And reaction is far more profitable."

"The trend is your friend until the end when it bends."

Conclusion & Recommendation

"Trend Commandments" is the distilled essence of the trend following philosophy. While it lacks the strategy specifics of more technical books, its value lies in building the conviction and psychological framework needed to follow trends consistently. Read it as a companion to more technical works on trend following systems for the complete education.