Ed Seykota is one of the best performing money managers of the past 40 years. He made many clients millionaires. Mr. Seykota was a trail blazer in using computers to back test trend following systems when he had to use punch cards to do it. Here are the principles that made him a trading legend.
#1 Ed Seykota was long through bull markets. He used mechanical buy and sell signals to follow the trend until the end, when it started to bend.
“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.”
#2 Ed traded a system that fit his own personality.
“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible”
#3 Ed always kept losses as small as possible.
“The elements of good trading are: 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance.”
#4 Ed did not watch the price action all day, he set buy orders if prices got to certain levels and set stop losses and let the markets hit those levels. He made his trading decisions when the market was closed.
“Having a quote machine is like having a slot machine at your desk – you end up feeding it all day long. I get my price data after the close each day.”
#5 His position sizing was small enough to avoid the risk of ruin when the trade lost money and big enough to generate good profits when the trade worked out.
“Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”
#6 Ed Seykota set physical stop losses in the market and used trailing stops to lock in profits on reversals.
“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.”
#7 He used the proper money management so he never blew up accounts or had big draw downs like so many other money managers and hedge funds.
“The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.”
#8 Ed tried to never risk losing more than 1% of his trading capital on any one trade.
“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.”
#9 Ed placed stop losses at the price level outside ordinary fluctuations that showed the trade entry was probably not going to work out and it was time to exit.
“Before I enter a trade, I set stops at a point at which the chart sours.”
#10 Ed Seykota was a technical trader of price action relying on price action and market psychology for his edge and profitability.
“Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals”. However, if you catch on early, before others believe, you might have valuable “surprise-a-mentals”.”