Ed Seykota: Everybody Gets What They Want
A pioneer of computerised trading systems, Ed Seykota graduated with a double degree in Electrical Engineering and Management from MIT. He was hired by a major brokerage firm where he developed the first commercially used computer trading system for managing the client’s money in the security market.
After a while, when he became an independent trader, he believed in keeping losses to a minimum, much like Paul Tudor Jones. When asked about the key elements of good trading, he said it is cutting losses, cutting losses and only cutting losses. To be a long term survivor in the market, one must have great money management skills.
He assessed that there are old traders and bold traders, but there are very few old and bold traders.
On any particular trade he doesn't allocate more than 5% of his equity, although he has lost more than 5% occasionally on the major news that caused the market to jump through his stop losses. This is a common mistake that can arise when being too confident about the back testing of one’s trading system. Never expect that there cannot be a move sharper than what you have observed previously. The worst and the best moves are yet to come. This can make or break any trading system, so be sure to design your systems to cope with such moves.
According to Ed, the key to long-term survival in trading has a lot to do with the money management techniques incorporated into the technical system. In order of importance those are:
- the long-term trends,
- the current chart pattern, and
- picking a good spot to buy or sell.
He finds fundamentals to be useless because the market has already discounted the price. However, if one catches it before others believe, it can prove to be valuable.
While buying, he tries to identify the market momentum to be strong in the direction of the trade, to reduce probable risk. He doesn't try to pick a bottom or a top.
He turns bullish instantly when his buy stop is hit and stays bullish until his sell stop is hit.
He admits that his biggest slips occur right after he got emotionally involved with positions. Pride, hope, fear and greed should not be a part of trading. He attributes his success to his passion and love for trading.
His trading rules in short are to cut losses, carry winning positions, keeping % of bets small, following rules without question and knowing when to break the rules.
His advice to an average trader is that he should let a superior trader do trading for him and then he should do what he really loves to do.
He believes psychology motivates the quality of analysis and puts it to use. The winning traders have usually been winning at their fields for years.
Another idea that he presented is being truly provocative. He suggests looking for the companies owned by institutions which are the top performers of the asset management company and where the number of institutions owning that stock has increased in the last year. A person’s trading performance reflects their priorities more than they would like to admit.