Pod Insights Michael Covel's Trend Following Ep. 1367: The Transformation V with Michael Covel on Trend Following Radio About this episode Please enjoy my monologue The Transformation V with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
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I'm MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I'm proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show.
To start? I'd like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/
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Hope you enjoy my never-ending podcast conversation!
Transcript 0:00 Speaker 00 Let me beat the dead horse. Risk management. But let's think about it from people who can't afford to be wrong even once. Look, let's get one thing straight. 99% of what we've all been taught about risk management, feel-good, corporate, poetry, bullshit, by people who've never had their ass on the line. I mean, maybe not even in a bar fight, right? I'm going to share with you. Risk management systems, reverse engineered from domains outside of trading, where one screw-up doesn't cost you a bonus. It costs lives, cities, spacecraft, or championships. Let me phrase it to you this way. Trend following is financial trauma surgery
0:43 Speaker 00 with a Marine Corps mindset and a Formula One trigger finger. Buckle up. Number one, US Navy carrier landings at night. Think about landing an F-18 on a boat. 30 knots in a storm, zero visibility, deck pitching 20 feet. Success rate has to be 99.999%. How is that? The landing signal officer has absolute authority to wave you off the instant any parameter is out of whack. The pilot does not get a vote. Ego doesn't get a vote. Quote, "I feel lucky tonight," end quote, doesn't get a vote. Wave off equals immediate, full throttle, gear up, no debate. Trend following is your personal landing signal officer.
1:27 Speaker 00 Sitting on the platform screaming, "Wave off", the second prices close below blank. You obey or you die. When I say closes below blank, whatever that entry or exit signal is going to be. I mean, it's all well-understood and I help people learn, but that is your landing signal officer, period. Number two. Spaceflight with NASA. Test as you fly, fly as you tested. Apollo 13, we've seen the films, almost killed three astronauts just because somebody swapped a 28 volt part for a 65 volt part. After that fuck up, NASA instituted configuration
2:09 Speaker 00 control so brutal that if a single resistor changes value, the entire mission is grounded until it's re-verified. Now, we also know this kept going with the space shuttle, right? Because we kept having problems, but they still kept building these systems in. But then there can still be a blow up. Trend following does the same. Every rule is frozen. You don't tweak your moving average because you read a hot sub stack. You change nothing unless you can prove it on a 100 years out of sample data. One untested tweak equals the Challenger O-ring debacle. Number three, firefighting on those wildlands out there. The 10 standard firefighting orders in 18 watch out situations printed on every single
2:54 Speaker 00 hotshots forum. Order number one, fight fire aggressively, but provide for safety first. Watch out number 14. When you feel like you're losing situational awareness, disengage. These rules were written in blood after guys got overrun in 1949 at the Man Gulch. Trend followings version, trade aggressively, but provide for capital preservation first. Cut your losses. And the second the trend breaks, situational awareness, lost. Disengage immediately. You're starting to see the theme here, right? It doesn't make a difference what you're
3:32 Speaker 00 doing. Engineering the space shuttle, fighting fires as a firefighter, it's risk management. If there's a problem, raise your hand. If there's a problem, stop. Cut your losses. It's David Ricardo 101.
3:50 Speaker 00 Number four, bomb disposal. One job, don't turn yourself into pink mist. Their risk mantra, time, distance, shielding. More time before the bomb goes off, more distance between you and the bomb, more shielding between you and the blast. Trend following translation, time, don't overtrade, wait for your appropriate entry and exit. Distance, one to 2% risk per trade, so the explosion can't reach the rest of your account. Not some of these jockeys out there throwing, who knows, 5, 10, 20% in a trade. Shielding, diversification across dozens of uncorrelated markets. Why?
4:32 Speaker 00 So no single bomb can take you out. Number five, the Antarctic exploration. Ernest Shackleton's Imperial Transarctic Expedition. I remember putting that quote, I think it was my first book or my second book, but such a great quote. "Every man came home alive in 1916 after their ship was crushed by ice." How? Shackleton had one non-negotiable rule. Quote, "No matter how bad you want the South Pole glory, the primary objective is always the preservation of the lives of every crew member." End quote. Every decision was subordinate to that rule. Trend following's prime directive, always preserve capital.
5:13 Speaker 00 Glory, those big wins comes second, survival comes first, everything else is negotiable. You gotta survive to play the game. This is how you have to think, this is how the great minds, the great traders think and operate. Period. Number six, now this is in the news when we see these fires out of Hong Kong, absolutely horrible, but you just know that is risk management incompetence. Because when it comes to high-rise, structural firefighting, the two-in, two-out rule, rapid intervention teams, this is the name of the game. You never enter a burning building with fewer than four firefighters. Two go in, two stand by, ready to drag the first two out, the second something goes sideways.
5:58 Speaker 00 Trend following has its own system like this. Cash and hard stops. You never enter a market without two firefighters standing by. One is your predefined risk amount. The other is your trailing stop. If the fire flashes over, trend goes the other way. They drag your ass out before the ceiling collapses. Now, I made note of the Hong Kong fire. That example doesn't exactly get into it. But we can just imagine that every damn rule when it comes to risk management was violated. Wrapping buildings so closely situated together in bamboo and styrofoam. Everything completely flammable. I mean, that's beyond breaking risk management. That's incompetence.
6:42 Speaker 00 Like, somebody actually knew that people would die by doing that and did not care. 100% they did not care. Yeah, there's people out there with risk management systems like that. Where they don't give a shit if they die. They don't give a shit if all the money goes away. I don't like to play that way. I don't think you like to play that way. Number seven, how about some offshore oil platforms? The blowout preventer stack. Deepwater Horizon, we all remember it. Taught the world what happens when you bypass the blowout preventer stack. Because we're almost done and it's costing money. Every modern rig now has redundant shear ramps that automatically slam shut.
7:23 Speaker 00 The instant pressure anomalies appear, even if the rig captain screams, "Hold my beer." Trend following's blowout preventer is the hard stop. It doesn't care that you're almost right. It doesn't care that you have a thesis. It shears the pipe the moment the trend says the well is going to blow. I love that. I mean, as a man, as a strong man, it makes you feel stronger. Because you have thought through the potentialities. You have thought through what can happen. And you're fucking prepared. Number eight, professional diving. U.S. Navy dive tables and commercial saturation diving. Here's the deal. You come up too fast, you die of the bends. Period. Divers don't negotiate with physics.
8:08 Speaker 00 They follow decompression schedules, calculated in 1908 and refined for a century. Trend following doesn't negotiate with drawdowns. We follow exit schedules calculated in the 1950s. Hell, earlier than that and refined across every market regime since. There's no, "I'll just hold on a little bit longer at 300 feet." You're dead. Number nine. You know, I just watched an interview with Alex Honnold the other day. The great free solo climber. El Capitan, 3,000 feet, no rope. He rehearsed every single move hundreds of times. On rope first. He knew exactly where every thumb went.
8:52 Speaker 00 Then on his real climb, if any single hold felt wrong, mission aborted. Instantly, instantly, no questions asked. Trend following is free solo for finance. You rehearse every setup on historical data until it's muscle memory. Then you execute with zero hesitation. But the second the market says, "That hole just crumbled," you downclimb or you fall. You fall means you dead. Number 10. How about a SWAT team? The dynamic entry. They don't kick the door unless they have over matching force and multiple exit routes.
9:32 Speaker 00 They never, ever commit the entire team into a fatal funnel with a covered retreat. Trend following never commits more than 1% to 2% into the fatal funnel of a single trade. The rest of your account is your covering force, ready to extract you, your wounded capital, the moment the room flashes. And I know that's kind of a crazy example, but these are all so similar. I mean, when you compare and contrast all of these different domains, these different disciplines, how could you ever want to trade the markets again without having this kind of philosophical
10:10 Speaker 00 risk management foundation and taking the philosophy to hard rules? It's gotta be done. If you don't do it, you're just a gambling nut job. Number 11. Let me give a Formula One example because they're good. 2021 Abu Dhabi, last lap. Max first stop and pits for fresh tires under the safety car while Hamilton stays out. Mercedes thought that they had the race managed. Red Bull executed ruthless risk asymmetry. One lap of glory versus an entire season. They took the 1% risk for the 100% payoff. Trend followers live for that moment.
10:53 Speaker 00 Tiny, repeated risk for asymmetric payoff when a trend goes your way. Jeff Bezos is famous for this too, right? If you can put, relatively speaking, a small amount of capital into a bet that has massive asymmetry to the upside. It's all you, man. You gotta do it. Let me give you some final truth here. Every one of these domains, carrier pilots, astronauts, hotshots, divers, free solo climbers, SWAT operators. They turned a once suicidal profession into a near miracle of survival by doing three things. Three, repeat them. They accepted that humans are fallible under stress.
11:38 Speaker 00 They built mechanical, ego-proof, emotionalist rules that force the right action. They never, ever break the rule to chase glory. What does that sound like? Ride your winners, cut your losers? Exactly sounds like that. Trend following is the only financial discipline that imported that exact triad. Lock, stock, and barrel. We don't predict the fire. We don't debate the bomb. We don't negotiate with the ice pack. We don't hope the reactor behaves. We don't pray the patient stabilizes. We react to what is, we keep every mistake microscopic, and we stay married to the position only as long as the trend,
12:22 Speaker 00 which is the runway, the decompression table, the fire behavior, the hold, the reactor parameters, says it's safe. That's risk management. Once you open your eyes to looking at the world this way, you can't go back. There is no return. Now, this doesn't mean you become somebody who doesn't take the risk. Of course not. But you understand what the risk is. You see the edge. Look, everything else, if you don't go this mindset that I'm talking today, everything else is just a PowerPoint slide and a prayer. At the end of the day, your money deserves to come home alive every single day.
13:04 Speaker 00 If you are going to bet and you don't have the risk management down, if you don't have this protection mindset first and the big trends second, okay, great, but you're probably going to get knocked out. Mike Tyson circa 19, what, 88, 89, something like that? One punch knockout, right? Look at the recent Bitcoin action. You just know that there were leveraged participants who got knocked out. People who had read the headlines and assumed that there was nothing but upside.
13:45 Speaker 00 They saw the Bloomberg report, the CNBC report, and Bitcoin was going to go to 200,000. Look, it might. I have no fucking idea. But it didn't right now. And depending on where some of these people were with their leverage, they're gone. They ain't coming back. If you had your net worth maxed out with max leverage, long Bitcoin, and when this recent shitstorm hit, you went home. You're back to your mom's basement. You're back to those tiny whiteys playing video games. And probably not recent video games. We're talking like Mario Brothers 1980s shit. You're done.
14:27 Speaker 00 Now, look, if anybody wants assistance with this mindset and with rules and techniques, my world can get you there. Whether it's my books, my podcast, the one you're listening to right now, my courses, my monthly newsletter, all kinds of options. I can save you time. And that's what it's all about, right? You can go figure everything out that I've figured out. Maybe it'll take you a handful of years. You might not get there, though. Maybe you'll get bored. Maybe you will not follow through. But if you want somebody who is dedicated, who will show you the way, who will give you the exact damn techniques that I'm talking about today, I can help.
15:11 Speaker 00 And oh, it just so happens that today, Cyber Monday...
15:16 Speaker 00 My last day of 2025, special for my Mastery Course and Coaching, is right now. And if you're not already on that list, and you want to be put on that list with an opportunity to take advantage of this offer, well, send me an email. I'm easy to reach, [email protected] . But hey, you've got about 24 hours only. You know, deadlines up. That's the way it goes. That's my hard stop. See you again next week.
15:51 Speaker 01 I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash, or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected] . I will send you the right trend following steps to take, along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.
Previous Ep. 1366: The Transformation IV with Michael Covel on Trend Following Radio Next Ep. 1368: Seth Levine Interview with Michael Covel on Trend Following Radio Page updated November 6, 2026 · transcript and summary are machine-generated
