The Little Book of Trading: Trend Following Strategy for Big Winnings

by Michael W. Covel

Quick Summary

Covel profiles successful trend following traders -- including Gary Davis, Jack Forrest, Rick Slaughter, David Druz, and others -- who have built fortunes by following price trends across diverse markets. The book distills their common principles: systematic rule-based trading, strict risk management, willingness to accept frequent small losses for occasional large wins, and the psychological fortitude to stay the course during inevitable drawdowns.

Detailed Summary

Michael Covel's "The Little Book of Trading" presents trend following philosophy through the stories and methods of traders who have proven its effectiveness over decades. Part of the "Little Book Big Profits" series from Wiley, it is designed to be accessible while conveying the essential principles of systematic trend following.

Each chapter profiles one or more trend following practitioners. Chapter 1, "Stick to Your Knitting," follows Gary Davis, Jack Forrest, and Rick Slaughter, showing how these traders maintained discipline and consistency through varying market conditions. Their common thread is adherence to mechanical trading rules that remove emotion from decision-making.

Chapter 2, "Someone's Gotta Lose for You to Win," profiles David Druz, whose career illustrates the zero-sum nature of futures markets and the importance of being on the right side of large moves. Subsequent chapters profile additional trend followers, each adding nuance to the core philosophy while demonstrating its universality across different markets, timeframes, and personal circumstances.

The book's recurring themes include: (1) the necessity of a systematic approach that can be clearly defined and consistently executed; (2) the counterintuitive reality that winning trend following systems typically have win rates below 50%, profiting from the large magnitude of winners relative to the small magnitude of losers; (3) the critical role of position sizing and risk management in surviving the inevitable losing streaks; (4) the psychological challenge of maintaining conviction during extended drawdowns when the system appears to be failing; and (5) the importance of diversification across many uncorrelated markets to capture trends wherever they occur.

Covel argues that trend following is accessible to anyone willing to commit to the discipline. The strategies do not require PhD-level mathematics, insider information, or fundamental analysis. They require only the willingness to follow a defined set of rules with unwavering consistency, particularly during the psychologically difficult periods when the rules produce losses.

The book also addresses common objections to trend following: that it cannot work because it is too simple, that past performance does not guarantee future results, and that markets have become too efficient for trend following to persist. Covel counters these objections with decades of live trading results from the practitioners profiled.