Ed Seykota’s 21-Investment Guidelines

Ed Seykota has always kept a low profile. If it weren’t for Jack Schwager’s Market Wizards books, chances are I wouldn’t be writing this post.

Ed Seykota has an Electrical Engineering degree from MIT and is a systematic trend follower. His trading is largely confined to the few minutes it takes to run his computer program, which generates signals for the next day.

If you want to get into the mind of one of the best traders around, this is your chance. He began his trading career in the 1970s, when he was hired by a major brokerage firm. It was there that Ed developed one of the first commercialized trading systems for managing money in the Futures market.

After a few disagreements regarding the way management was interfering with his system, Seykota decided to go out on his own.

1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading.
2. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in.I turn bullish at the instant my buy stop is hit and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
3. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours.
6. The markets are the same now as they were five to ten years ago because they keep changing — just like they did then.
7. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be a risk.
8. Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth.
9. I usually ignore advice from other traders, especially the ones who believe they are on to a“sure thing”. The old timers, who talk about “maybe there is a chance of so and so,” are often right and early.
10. Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top
11. Trend systems do not intend to pick tops or bottoms. They ride sides.
12. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
13. The manager has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important — often more important than trade timing.
14. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable and under-capitalized, and inexperienced traders will get shaken out. Longevity is the key to success.
15. Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
16. I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.
17. Trading Systems don’t eliminate whipsaws. They just include them as part of the process.
18. The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses.If you can follow these three rules, you may have a chance.
19. If you can’t take a small loss, sooner or later you will take the mother of all losses.
20. One alternative is to keep bets small and then systematically keep reducing risk during equity drawdowns. That way you have a gentle financial and emotional touchdown.
21. The trading rules I live by are:

• Cut losses.
• Ride winners.
• Keep bets small.
• Follow the rules without question.
• Know when to break the rules.

Seykota feels investors shouldn’t get emotionally attached to their trading bets as it may lead to huge losses.

“Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions,” he said.

Seykota is of the view that the market is always right and investors should make their trading bets without letting their emotions get the better of them.

“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right,” he said.

Ed Seykota may be one of the only traders who also wrote and starred in a musical performance of his trading strategy “ The Whipsaw Song”.

Ed Seykota’s wisdom will live on long after he is gone. Not only is Ed a successful trader, but he is also a great teacher. All traders regardless of their experience can learn something from Ed and use his knowledge to better their performance in the markets.

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