I am going to talk about Ed Seykota´s interview in the book The Market Wizards of Jack Schwager.
He was one of the less known traders when the interview was made. He, as Al Weiss, likes to have a peaceful and tranquil life far away from Wall Street.
After years of successful trading, he decided not to accept more funds or customers. He wanted a more quiet life and his time to other endeavors like psychology or physics where he is developing his own theories.
He was originally an electric engineer.
Ed Seykota Trader
He recognized that he was a system trader, but despite that what is interesting about the interview is that his system is a trending one, with a tight stop loss strategy. He says it so many times that if you pay attention you realize how important it is.
It is one of the best trading interviews ever; to be read entirely.
He also was the mentor of the legendary Michael Marcus.
Ed Seykota trading quotes
Over the course of about a half year, I was able to test about a hundred variations of four simple systems for about ten years of data on ten commodities.
He confessed that he was a system trader and a programmer. But, later, at the same time he said that the best systems are those that follow the trend. And the systems were not about day trading obviously.
Management wanted me to change the system so that it would trade more actively, thereby generating more commission income.
It is one of the main problems we face in the world of trading. That is that all brokers, market makers and marketers of every type want us to trade a lot since they make their living from commissions and volume. That is the why about day trading popularity.
If, for example, they are able to support me and my methods over the long term, then they tend to help me. If, however, they get too concerned with the short-term ups and downs of their account, they can be a hindrance.
Ed Seykota trading system
Seykota managed fund from many customers. And this a typical problem of the sector. Most people only want to see profits, so they get too concerned when the fund goes down 3%. That is why they tend to follow systems with small and constant profits. The problem with that is most of those systems end up going belly up.
Seykota´s approach of letting profits run and taking small losses do not sell easily for the masses.
There are old traders and there are bold traders but there are very few old, bold traders.
It is one of the best quotes about trading ever. The truth is that most people who start trading securities today end up going bankrupt with their retail accounts. They trade boldly and bravely but doing day trading it does not matter how bold you are.
Many of the good systems are based on following trends. Life itself is based on trends. Birds start south for the winter and keep on going. Companies track trends and alter their products accordingly.
Ed Seykota trend trading
However, most people think that some trends exist forever. They do not understand that every trend has an end. That is why when there is a bubble people think it will never end and keep on loading garbage like in the housing bubble. Yet when there is a trend a trader has to bet his short term trades following that trend.
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.
It is something obvious. A lot of people think that when they discover a good short term system it will work forever but the truth is that it will not.
Arbitrageurs will discover those price inefficiencies sooner or later and will jump into the wagon making those inefficiencies disappear.
You know if you open a store in the street with no competition you will make money, but as soon as other people see your success and start opening shops like yours the “system” stops working.
The elements of good trading are: cutting losses, cutting losses, and cutting loses. If you can follow these three rules, you may have a chance.
Do you understand?
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, does not 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.
This is one of the best trading quotes ever again.
Not many people use trailing stops, and I have to admit that long time ago I thought they were useless, but I do not anymore.
The second part of the sentence is very truth. At the end of a bull or bear market volatility tends to be extreme. In those periods, it may well be advisable not to trade and take your profits.
Having a quote machine is like having a slot machine on your desk – you end up feeding it all day long. I get my price data after the close each day.
Ed Seykota day trading?
Do you see? Seykota did not do day trading.
His trading charts or data are based on daily data. He only needed the closing price (the most important one) to determine his trading decisions.
After all, you do not need to be in front of you trading platform the whole day.
It is better for your health.