Day: October 11, 2022

I was reading a bit more about Ed Seykota after seeing The Whipsaw Song. Ed Seykota became famous after appearing in Jack Schwager’s Wall Street Wizards book. He has an Electrical Engineering degree from MIT and was one of the pioneers of systems trading. He supposedly returned 250,000% over 16 years for one of the accounts he managed. Below I have categorized some of the quotes that I have come across. Ed Seykota’s Trading Style My style is basically trend following, with some special pattern recognition and money managementalgorithms. 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 consider trend following to be a subset of charting. Charting is a little like surfing. You don’t have to know alot about the physics of tides, resonance, and fluid dynamics in order to catch a good wave. You just have to be able to sense when it’s happening and then have the drive to act at the right time. Common patterns transcend individual market behavior (my note: i.e. price patterns are similar across different markets). Overall Rules Trade with the long-term trend. Cut your losses. Let your profits ride. Bet as much as you can handle and no more. Buying on Breakouts 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. I don’t try to pick a bottom or top. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instantmy buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical. Only Exit When Stops are Hit and Set Stops Immediately I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit asthe 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. Before I enter a trade, I set stops at a point at which the chart sours. Learn to Get Back In Getting back in is an essential part of trend following. Hold Your Position Until the Trend is Invalidated, Do Not Let Go of Your Position. Be Willing to Experience Your Anxieties Maintaining a commitment is particularly important when it comes up for a test. Somewhere along the line of keeping your commitment you may get a feeling that you don’t like. If you are willing to experience the feeling, it can transform into an AHA that supports your commitment. If you are unwilling to experience the feeling, you might abandon your commitment to try to make the feeling go away. That only results in having to feel the feeling after all. The more you are willing to experience the feeling of bumping into walls, the less you have to bump into walls. Trading requires skill at reading the markets and at managing your own anxieties. People have a Conscious Mind and Fred. Fred wants to communicate feelings to CM so CM can experience them and gain experience and share it with Fred so Fred can learn how to react. This is how we manufacture wisdom. When we don’t like our feelings we tie them in k-nots and do not experience them. This interrupts the wisdom manufacture process, and draws drama into our lives. K-nots, protect us from truth and keep our lives in drama. To untie k-nots, fully experience whatever appears in the moment. When you keep your eye on the prize and are willing to experience all the feelings that arise, the prize soon becomes yours. Do Not Shut Out or Ignore Your Fear The positive intention of fear is risk control. People who are unwilling to experience fear tend to take big risks and wind up in big drama in which the risk materializes. People with poor risk control tend to bet heavy. So they tend to outperform others in good markets, and under-perform them in poor ones. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be risk. Risk control has to do with your willingness to allow your stop to do its job. Risk Below 5% of Equity Per Trade I intend to risk below 5% on a trade, allowing for poor executions. Occasionally I have taken lossesabove that amount when major news caused a thin market to jump through my stops. Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play. 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. This is essential as large fluctuations can engage Fred and lead to feeling-justifying drama. Betting more boldly produces more volatility. Good traders are familiar with both and keep their trading well within their tolerances. I use a rule of thumb that you place less than 10% of your liquid net worth at risk and that you stop your losses at 50% of that – so you have net exposure of 5% of your liquid net worth. If you have a net worth of 1.5 million, you might have liquid net worth (cash, stocks, bonds, etc) of, say, about 500,000 (a wild guess). Then you … Read more