Ed Seykota is a trend following trader that uses reactive technical analyses through quantified trading signals to capture large profits during trending price action. He has parameters for proper position sizing, volatility filters, and optimizes his strategy for large wins and small losses.
Ed Seykota Trading Rules
“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.”
“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.”
“Before I enter a trade, I set stops at a point at which the chart sours.”
“If you can’t take a small loss, sooner or later you will take the mother of all losses.”
“Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”
“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.”
“I intend to risk below 5 percent on a trade, allowing for poor executions.”
“Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top”
“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 {emotions} and lead to feeling-justifying drama.”
Ed Seykota’s five core trading rules summed up:
Rule #1: Cut losses
Rule #2: Ride winners
Rule #3: Keep bets small
Rule #4: Follow the rules without question
Rule #5: File the news in the trash
Ed Seykota Moving Average System
During Ed Seykota’s interview in the book Market Wizards by Jack Schwagger, Ed describes the influences that Richard Donchian had on his trading system. Donchian traded with a five and twenty day moving average crossover signal system, and devised buy and sell rules using a weekly time period. While Donchian used a five and twenty day moving average crossover system, Seykota used exponential moving averages (where more weight is given to the more recent data to calculate the moving average). Seykota researched and backtested this strategy in the early 1970s – when computers were new and very slow. For example, he tested approximately 100 variations of four simple trend following systems on a computer that was the size of a room, and the tests took him six months to complete.
Ed Seykota Returns
“Mr. Seykota himself has put together a money management track record with returns of roughly +60% net of fees over the three-decade span of his trading career…” -Futures Magazine
Ed Seykota Books
The Trading Tribe by Ed Seykota
Govopoly in the 39th Day by Ed Seykota
Ed Seykota Whipsaw Song