Edward Arthur Seykota was born on August 7th, 1946. He is famous as a commodities trader. Ed Seykota has an S.B. degree in Electrical Engineering from MIT. Moreover, he did Management from the MIT Sloan School of Management.
Ed Seykota was a pioneer of Systems trading in 1970. He start using punched card computers to test ideas on trading all markets. His home was in Incline Village, Nevada. It is on the north shore of Lake Tahoe. But now he lives in Texas.
The Career of Ed Seykota
How it started
Seykota went to a high school near The Hague, Netherlands. In addition, his home was also in Voorburg. He was a pioneer of computerized trading systems in 1970. We also call them now Trading System only. He and Michael Marcus were working for the future market.
Then he starts venturing out himself and managing a few clients’ accounts. The main reason for the success of Ed Seykota is its development. And the way of utilizing the computerized trading systems. First, his first test was on a mainframe IBM computer. Then, his system was launched into his brokerage house, where he was working.
The Interest in Computer System Trading
He read a letter by Richard Donchian, and his interest was even more in computers. There were things about utilizing mechanical trends following trading systems in the letter. Moreover, there was also Donchian’s 5 days and 20-day moving average system in the letter.
Another inspiration of Ed Seykota in the book by Edwin Lefèvre, “Reminiscences of a Stock Operator”. So, his first trading development is having a base on exponential moving averages.
Market Wizards and Other Traders
The main thing that needs to know is that systems don’t need any change. Only the trader has to develop a system that is compatible with him. The system by Seykota has also improved over time.
There are new systems and styles that fit his preferences and trading styles. The initial version was having a rigid system. But then, there was the addition of new rules in the system. It was the pattern triggers and money management algorithms.
The main reason behind his success was his genuine love for trading. Moreover, he was also having an optimistic manner. These factors were pioneers of his efforts. So, he continuously starts to improve his system. He only adds you to fine-tune with market stimuli but does not change response indicators.
The Trading Tribe
Ed Seykota was with a group in 1992. It was a group of traders who discuss their emotions. The main concern of Seykota was that traders allow emotions to overrule logic. Then, after the first gathering, they start to gather regularly. There were methods that Seykota used to support personal growth.
After years, there were Tribes all over the world. And the people from many professions. The members help in starting the common set of practices. These are the Trading Tribe Process (TTP).
The ideas and practices are in The Trading Tribe (2005). Moreover, there is also a refinement in an online article, “TTP Extensions: Replacing the Zero-Point Process with the Rocks Process”. There are ideas of refinement processes in it.
Books of Ed Seykota
Below are the books by Seykota:
- The Trading Tribe (2005)
- Govopoly in the 39th Day (2013)
Trading Rules of Ed Seykota
There are some rules for trading by Seykota. By following these rules, anyone can get success in trading. Below are some of the major rules:
1. Cut Losses
The first rule is cutting losses. How? You may have known about the old adage about cutting losses. Then the winners are only there to run. It’s been in practice for years. But it is also necessary.
The reason behind the cut losses rule of Ed Seykota is the same. The reason is to protect the capital. And it is the primary job of a trader. Then the second one is making money.
There is one thing to keep in mind as well. Instead of saying cut losses, you can change the term to cut losses early. This thing is worth thinking. Without money, you cannot trade. So, if you fail to cut early losses, you can blow the account.
There is an important piece of advice by Seykota on losing. He says that Embrace trading losses. This advice is simple but is true. If someone wants to go ahead in the business. Then he must learn to lose like the one who wins.
It means that you have to accept the loss of time when the market is invalidating your ideas.
2. Ride Winners
Do you want to know how to make a profit consistently? Well, the rule is quite simple for this. After cutting losses, you will have to ride winners. This is according to Ed Seykota. Not only Seykota, but every profitable trader does the same thing.
Trading is not that your win rate must be 70% or 80%. The win rate comes down to how much you are making. And it also includes how much you are losing when you are wrong. These are the only important things that matter a lot.
Let’s expand this idea. Below is the list of famous traders or investors:
- Paul Tudor Jones
- Bill Lipschutz
- Warren Buffet
- Carl Icahn
- Ray Dalio
We are pretty sure that you know these famous people if you are into trading. These are the ones who make consistent profits. But no two market players that are on the list are having the same style. Everyone has their own unique style of trading. They make different options depending on their style.
One common rule
But the main thing to know over here is that they share one common rule. What is it? All of them require an asymmetrical risk to reward ratio. The only way in which you can achieve asymmetrical returns is by riding the winners.
3. Keep the bets small
Here is rule number 3. You will have to keep the bets small. If you want to keep emotions aside and want to trade free handly. Then you must keep the bets small while you are trading. If you put big amounts on one trade. Then you can be full of fear and as well greed.
The best part about the trading rules of Ed Seykota is that he also keeps the bets small.
How Ed Seykota Keeps His Bets Small?
You can know about the trick of Seykota over here. All you have to do is speculate with almost less than 10% of the liquid net worth. You must risk almost less than 1% of the speculative account that is on trade.
Here is the trend that is used for keeping the fluctuations in the trading account small, which is relative to net worth.
The important thing to keep in mind is that the risk per trade of Seykota is less than 1% of the total account balance. It helps to allow in enduring the losing streaks without losing the account.
But here is another thing to keep in mind. He defines a percentage of the liquid net worth too. The main things in it are cash and other assets that he can turn into cash whenever he wants.
So, as his rule says, he only trades with less than 10% of his liquid net worth using his trading account.
Importance of manageable bet size
It is important in several ways. The main reason is that it drives home the significance to trade with disposable income. You may say, in other words, that it’s risking money that is not for rent, groceries, other necessities and utilities.
This concept is also famous for trading with scared money. After combining all the rules of Seykota, you will know that there is actually no room to trade with scared money or risk a lot of account balance. It is no doubt a winning combination.
Another important thing that Seykota says is that do not risk more than that you can afford to lose. Moreover, he states that risk is enough so there can be a meaningful win.
4. Follow the rules without Questioning About Them
Every trading rule is important if you want to become successful. Whether it is a rule that defines how much you must risk. Or the rule that tells you what you are going to do if there is a losing streak. To become successful, trading rules are essential.
You must get the Eds’ rules into your mind if you are doing trend trading. These can help you a lot in making a successful trade. But another main thing to note is that there are many rules of Ed that are proprietary, and these are not available publically.
The proprietary rules are not essential at all. They are essential but according to his own moves. The most important thing to know is that you can’t show up and then leave whenever you want to. Just like your boss wants you to do a certain thing. There are also boundaries in many other things of life. But there are no boundaries for trading.
Why There Are No Boundaries?
When you start to make a trade or choose a specific thing on which you have to trade. Then nobody tells you how much risk is there. Or whether you have to buy a stock or sell it. Everything is up to you.
This is the reason why trading rules are essential. This thing helps you in getting more disciplined in the world without any limits or boundaries.
5. Must Know When To Break Rules
The fifth rule is to know when you need to break the rules. This thing is quite the opposite of the above things. This is because we told you that rules are essential to follow. But why are you supposed to break them now?
Seykota also explains why keeping a balance between following the rules and breaking the rules is essential. Below is what he says about breaking the rules:
There are times when he trades totally off the mechanical part. But sometimes, he overrides the signals that are based upon strong feelings. Moreover, there are sometimes in which he just quit altogether.
He says that if he does not know himself, he discharges the creative side of freedom. It can build up to a kind of blowout for him. If someone strikes a workable ecology. Then it means that he is promoting the trading longevity that is the essential key for success.
In other words, you can say that Gut feeling is also important, like following other trading rules.
Ed Seykota is undoubtedly the best and one of the successful traders of the time. He is not a price action trader. But the lessons that he gives us are very valuable.