William Eckhardt, Master of Automated Trading

Eckhardt, Mathematics and Trading Systems

William Eckhardt is one of the famous original turtle traders. He made the famous turtle traders experiment along Richard Dennis.

Eckhardt is a mathematician that started to trade in the pits of Chicago and shortly after noticed that trading from home suited him better than in the pit. And that is because he follows an automated trading system approach.

He believes that studying the markets you can find some patterns that repeat through significant periods of time.

William Eckhardt New Market Wizards

Eckhardt´s interview in the book The New Market Wizards by Jack Schwager is very interesting. And like the rest of the interviews is worth reading.

You can get very interesting points by reading this interview.

Everyone who wants to try an automated system for trading should read this. The opinion of Eckhardt is clear: the majority of systems are worthless.

William Eckhardt quotes

He said this about trading systems optimization:

You really are caught between conflicting objectives. If you avoid optimization altogether, you are going to end up with a system that is vastly inferior to what it could be. If you optimize too much, however, you will end up with a system that tells you more about the past than the future. Somehow, you have to mediate between these two extremes.

If the result of a system does not look good at first sight, it is because probably it is not a good system. For the system to be good, it has to have a spectacular result.

As a general rule, he is very skeptical about results. The better a system look, the more suspicious you have to be about it.

It goes against human nature, which want to see good results where they really are not.

My own experience proved that.

Many times that I made studies using different technical analysis and indicators for the historic data, I would find “great” strategies that promised marvelous returns, also doing day trading.

But when I tried to implement those systems in real trading it would end up in disaster. I did never understand why. How could such a good system fail? Something was obviously wrong. There were many things I did not count on when I made those studies. Mi human nature and ego did not allow me to “see”.

William Eckhardt trading

Eckhart says that when you have a system it is very likely that you should adjust it by 30 or 50 %. That is why he would only try systems that have a fantastic return even in the worst scenarios. And, even though, he is conscious that conditions may change in the future, and the system become invalid.


His trust in charts was zero, and it can be resumed in this phrase:

The majority of good things that can be seen on a chart do not work 98 % of the time.

William Eckhardt patterns

His theory is that the human mind is made to create patterns, seeing patterns even in random inputs.

While I agree about his view of human nature, I do not agree with what he said about charts.

I think that in a way, charts are not necessary, if we know the price action of the market in the previous months or years (as Livermore). Because with price action we may have a general idea where the markets are.

However, charts may be useful to help us save time writing down or memorizing the prices of the assets.

The charts are very useful to see what happened the last 20 years of every asset and doing so we can see interesting things, like how a big bull market behaves. If you use them and a bit of macro and fundamental analysis, you may know when the market is overvalued or not.

If we see, for example, sugar going from 5 to 15, then to 30 and then to 60 $, it is clear that there is a bull market and we should trade the long side. But also, at 60 we should know that a correction is very likely and should be prepared for that. And charts are useful for seeing those bull markets.

But, the good thing about this interview is that Eckhardt is a trend trader. His systems were based on trend trading techniques.

He says:

I do not like to buy retracements. If the market is going up and I think I should be long, I would rather buy when the market is strong than wait for a retracement. Buying on a retracement is psychologically seductive because you feel you are getting a bargain versus the price you saw a while ago.

This is very difficult to do. I also think that when the trend is bullish you do not need to wait for a reaction, you just go long. But as Eckhardt says, the majority of traders find it very difficult to buy at an “expensive” price.

However, buying corrections in a bull market is not bad per se as long as you trade the correct trend.

About trading systems he also said:

I have looked about fifty. Out of those fifty, how many had value? One

If you have the resources to evaluate systems, your time is better spent developing your own ideas, I would not recommend buying systems.

Occasionally, it might happen that somebody comes up with something really good and sells it because he needs the money. But in my experience, something good is not discovered on a Greyhound bus while leafing through me charts; it is something developed over a period of years. Typically, if a person has invested sufficient time and money into developing a system, he or she will want to use the system, not sell it.

Do you understand?

The majority of people who have good trading systems will not sell them. That is why most of the systems that are sold do not work in the long run.

The best thing a trader can do is to trade based on his own ideas. If he has no ideas and want to look for a system, he should trade money he can afford to lose and as little as possible. For if the system does not work the trader will have lost a tiny amount of his savings.

He also says:

One common adage on this subject is: You cannot go broke taking profits. That is precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.

Well, this is what I sometimes talk about.

And finally:

I think that the execution edge was probably the primary reason for my success as a floor trader. The major factor that whittles down small customers accounts is not that small traders are so inevitably wrong, but simply that they cannot beat their own transaction costs. By transaction costs I mean not only commissions but also the skid in placing an order. As a pit trader, I was on the other side of that skid.

Pit traders and market makers of every kind were and are the real “day traders”. So if you want to be a day trader you know what you have to do. And trying day trading from home with a retail platform in a retail broker is not the way.