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Trend Following: Learn to Make Millions in Up or Down Markets

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Michael W. Covel explains the tenets of his book: Trend following is based on simple universal laws we can all learn.
This chapter is from the book
  • “Speculation is dealing with the uncertain conditions of the unknown future. Every human action is a speculation in that it is embedded in the flux of time.”
  • —Ludwig von Mises1

The Market

A market is simply a place where buyers and sellers gather to trade and exchange goods, buying and selling for any number of reasons across all types of instruments (for instance, stocks, currencies, commodities, and so on). Markets perform the essential role of exchange. The New York Stock Exchange and the National Association of Securities Dealers Automated Quotation System (NASDAQ) are two exchanges. There are also futures exchanges, such as the Chicago Mercantile Exchange. All of these exchanges have many markets where traders can buy and sell whatever they want. They are the place where organized speculation takes place.

Although this might sound simple and might sound as if I am focusing on a minor point, I am not. The markets’ capability to provide a “price” for buyers and sellers to rely on as fact in the course of speculation is crucial. Ludwig von Mises, the noted Austrian economist, puts it into perspective:

  • “It is the very essence of prices that they are the offshoot of the actions of individuals and groups of individuals acting on their own behalf. The catallactic concept of exchange ratios and prices precludes anything that is the effect of actions of a central authority, of people resorting to violence and threats in the name of society or the state or of an armed pressure group. In declaring that it is not the business of the government to determine prices, we do not step beyond the borders of logical thinking. A government can no more determine prices than a goose can lay hen’s eggs.”3

Although government can’t determine prices in the long run, in the short term as we have all seen with the popping of the credit bubble, the government can greatly affect the market system. However, at the end of the day, all we have are prices and speculation. Because that is the case, finding out how to best “speculate” using market prices is a worthy endeavor.

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