Learn From the Best
As with all endeavours, one of the best ways to learn and develop your talent and ability is to follow the wisdom of those who have walked the path and achieved success. In the world of financial markets trading, one such person is Ed Seykota.
Ed Seykota is a Dutch trader who made a name for himself by pioneering “Trading System”, one of the first electronic trading systems, at the brokerage house he was working for in the 70s, which used basic punch card computers to test trading ideas.
Ed is widely renowned as one of the most successful automated traders. After developing his early systems while working at a brokerage trading in the futures market, Ed soon struck out on his own and managed money for clients through his systems.
After years in the markets and achieving astonishing returns, Ed Seykota has cemented his place in financial markets history and in the words of Market Wizards author Jack Schwager, his “achievements must certainly rank him as one of the best traders of our time”.
So, in order to give you some insight and helpful guidance from this trading titan, I’ve rounded up a few of Ed’s top tips. Read on to learn from some of the wisdom of someone who made it to the very top of the trading world.
On Technical Analysis:
- 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. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
- 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.
On risk management
- 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.
- 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.
Long Term Trading
- The shorter the term, the smaller the move. So, profit potential decreases with trading frequency. Meanwhile, transaction costs stay the same. To compensate for profit roll-off, short-term traders have to be very good guessers. To improve guessing skills, you can practice dealing cards from a standard deck, one at a time. When you become very good at it, you might be able to make money with short term trading.
- 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 undercapitalized and inexperienced traders will get shaken out. Longevity is the key to success.
On Systems Trading
- 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.
- A computer can follow a system and place orders without making predictions or anticipation. Predictions and anticipations are objects you create. These objects may interfere with sticking to your system
On Money Management
- 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.
- 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.
On the Mindset of a Winner
- The “doing” part of trading is simple. You just pick up the phone and place orders. The “being” part is a bit more subtle. It’s like being an athlete. It’s commitment and mission. To the committed, a world of support appears. All manner of unforeseen assistance materialises to support and propel the committed to meet grand destiny.
- It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with the skill to help them.