Ed Seykota: A Trading Legend Focused on Psychology, Performance, and Success
Ed Seykota, although relatively unknown to the public and financial community, is widely regarded as one of the greatest traders of our time.
Out of all the traders I have studied, Ed ranks as the most quoted and influencial trader of all. This is a remarkable achievement as the traders quoting him rank within the best performers in the world. To gain insight into his performance, here is the following:
From 1972 until 1988, a customer account Ed took over, starting with $5,000 had grown over 250,000 percent on a cash-on-cash basis to $12,000,000. Normalized for withdrawals, the account theoretically experienced gains of several million percent or to what could have been over $100,000,000 (If liquidity was not a contraint).
This track record is unmatched by any other trader over a similar length of time.
Let's delve into Seykota's timeline, trading approach and lessons to uncover the secrets behind his success.
Timeline
In the early 1970s, Seykota was hired by a major brokerage firm, where he developed the first commercial computerized trading system for managing clients' money in the futures markets. Despite the profitability of his system, interference and second-guessing by management hindered its performance. This experience led Seykota to leave the firm and pursue trading on his own.
Over the years, Seykota applied his systematic approach to trading to manage a handful of accounts, including his own.
Although relatively unknown to the public and financial community, Seykota's influence on successful traders is significant. Michael Marcus, a successful trader himself, credits Seykota as the person who transformed him into a successful trader. Seykota's reputation for both his trading prowess and his intellectual capacity led to an interview request for a book project.
Seykota's unique perspective and combination of intelligence and sensitivity are evident. He holds a degree in electrical engineering from MIT and approaches trading with a scientific mindset. He developed numerous computer programs and analytical techniques, demonstrating his technical expertise. However, he also delved into the psychology of trading, showcasing his insights into human behavior. In recent years, Seykota has become increasingly involved in psychology and its application in solving problems, suggesting that psychology and trading are inseparable in his view.
Seykota's success extends beyond trading; he has found meaning in his life and is living the life he wants. His involvement in psychology in later years seems to have become more important to him than market analysis and trading, indicating a shift in his interests and priorities.
When asked about his entry into trading, Seykota mentioned his initial involvement with silver and his fascination with how markets work. He learned about Richard Donchian's theories on trend-following systems and conducted computer tests to validate them. This research confirmed the potential for making money from trend-following systems, leading Seykota to pursue trading full time.
Seykota's first trading-related job on Wall Street was as an analyst covering the egg and broiler markets. Despite his position, he was given the responsibility of providing trading advice. Dissatisfied with the stifling environment and the lack of access to company computers for testing trading systems, Seykota decided to quit and found another job where he could utilize the computer department during weekends to test his trading systems. His research confirmed the profitability of trend-following systems.
Management recognized the potential of Seykota's research and supported him in developing the first large-scale commercial computerized trading system. However, interference from management, including second-guessing the system's signals, impeded its performance. This meddling led Seykota to quit, along with other reasons such as management's desire for more active trading.
This is when Ed officially starts his career as an independent money manager. The rest would go down in the history books.
His Approach
Ed Seykota's trading approach can be characterized as systematic trading. He uses a computer program to generate signals for the next day and spends only a few minutes executing trades. His analytical techniques, combined with his sensitivity and insight into human behavior, contribute to his success.
According to Ed, trading requires a disciplined approach, backed by a strong set of principles and rules. His trading philosophy revolves around key principles such as cutting losses, riding winners, and adhering to rules. Let us dig into some of Ed’s most famous quotes and lessons.
Cut losses and Maximize gains
"The trading rules I live by are:
1. Cut losses.
2. Ride winners.
3. Keep bets small.
4. Follow the rules without question.
5. Know when to break the rules."
Ed emphasizes the importance of cutting losses promptly. He cautions that failure to do so can lead to catastrophic losses. By implementing proper risk management strategies, traders can protect their capital and preserve their ability to participate in future opportunities and maximize their potential. As Seykota stated,
"Risk no more than you can afford to lose, and also risk enough so that a win is meaningful."
Traders should strike a balance between risk and reward to ensure that winning trades outweigh losses. It is only the sum of these parts that allow true outperformance.
Ed has a clear opinion on size and advises,
“Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”
Charting and Market Analysis
"In order of importance to me are:
1. the long-term trend
2. the current chart pattern
3. picking a good spot to buy or sell."
Ed Seykota's approach to charting focuses on identifying the long-term trend and current chart patterns. He recognizes that trends can provide valuable insights into market direction. By combining technical analysis with proper timing, traders can increase the probability of successful trades. As Ed beautifully puts it,
"The trend is your friend except at the end where it bends."
Traders should be cautious of trend reversals and adapt their strategies accordingly.
Risk Management and Money Management
"The elements of good trading are:
1. cutting losses.
2. cutting losses.
3. cutting losses.
If you can follow these three rules, you may have a chance."
Ed's emphasis on cutting losses underscores the importance of risk management. Properly managing risk is essential to long-term trading success. Additionally, he advises,
"If you can't take a small loss, sooner or later you will take the mother of all losses."
Psychology of Trading:
"Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions."
Ed recognizes the psychological challenges that traders face. Emotions such as pride, hope, fear, and greed can cloud judgment and lead to poor decision-making. Successful traders understand the importance of staying disciplined, avoiding emotional attachments to positions, and sticking to their trading plans. Ed Seykota advises,
"It's all about sticking to your plan and experiencing feelings as they arise. If you are unwilling to feel your feelings, the temptation is to avoid them by jumping off your system."
Adaptability and Market Observation
"If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it's coming in, it'll never happen. The market is always right."
Seykota encourages traders to observe the market and adapt to its movements. Just as surfers read waves, traders should sense market opportunities and act at the right time. The market is constantly changing, and successful traders understand the need to flow with its rhythm rather than resisting it. As Seykota astutely notes,
"Trends become more apparent as you step further away from the chart."
I hope this overview helps you understand the key principles Ed used to dominate the playing field for so long.
"Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money."
This would not be a successful blog if we did not address the deepest trading quote of all times. Throughout my trading career, from a beginner to a decade later, this comment made my Ed Seykota as part of his market wizards interview has had the deepest impact on my journey.
It embodies the ethos of the struggle we face as traders and portrays our rawest truth . It is and will be felt by every trader that has had the pleasure and pain to embark onto the adventure.
This concept was explored by Freud a century ago and helps us understand the concept of the unconscious mind and its influence on human behavior, desires, and motivations. Sigmund Freuds theories often emphasized the significance of unconscious processes in shaping an individual's thoughts, emotions, and actions.
"It is certainly possible to believe that the vast majority of human beings live without having ever reflected on what they are doing, and live instead as though they knew exactly what they are doing."
(The Question of Lay Analysis, 1926)
Ed Seykota's quote reflects his understanding of human behavior and the role of the market in fulfilling people's desires, even if those desires may seem counterintuitive. In this statement, Seykota suggests that everyone ultimately achieves their desired outcome, regardless of whether they win or lose in the market.
Seykota points out that there are individuals who, consciously or unconsciously, prefer losing money in the market. Although it may seem paradoxical, these individuals find some form of satisfaction or fulfillment through their losses. It could be due to psychological factors such as self-sabotage, a need for punishment, or even a distorted perception of success.
By acknowledging this phenomenon, Seykota highlights the complexity of human desires and motivations when it comes to trading and investing. It serves as a reminder that the market can reveal not only our aspirations for profit but also our deeper psychological needs and behaviors.
In essence, Seykota's quote suggests that success or failure in the market is not solely determined by financial outcomes but also by individuals aligning their actions with their underlying desires, whether consciously or unconsciously. It underscores the importance of self-awareness, introspection, and understanding one's motivations when engaging in financial endeavors.
It highlights the absolute need for introspection work such as journaling, discussing, analyzing and more in order to align the self with your values and deep desires.
Overall, Seykota's quote sheds light on the intricate relationship between human psychology, desires and values, and the outcomes we experience in the market, emphasizing that everyone ultimately gets what they truly want, even if the manifestation of those desires might appear contradictory or unexpected.
Final Thoughts
Ed Seykota's influence on the trading community is undeniable. His remarkable track record, combined with his insightful lessons, has made him a legendary figure in the world of trading. Seykota's success is rooted in his disciplined approach, risk management strategies, and ability to adapt to market conditions.
Seykota's emphasis on charting and market analysis highlights the significance of identifying the long-term trend and current chart patterns. By understanding market direction and timing trades accordingly, traders can increase their chances of success.
Proper risk and money management are crucial elements of Seykota's approach. He advises risking an amount that is both meaningful and within one's affordability. This balance ensures that winning trades outweigh losses and contributes to long-term profitability.
The psychology of trading plays a significant role in Seykota's philosophy and is the reason why he remains the teacher of masters in the trading world. Moreover the fact that Ed was not only able to rank as the best teacher but also performer puts him in a completely different ranking altogether.
Lastly, Seykota's emphasis on adaptability and market observation is a valuable lesson. The market is constantly changing, and successful traders must be able to adapt to its movements. By observing market opportunities and flowing with the rhythm of the market, traders can position themselves for success.
Ed Seykota shared and still shares the most information about becoming a successful trader out of the top traders basket, if you aspire to be a successful trader or want to learn more, check out the FAQ on his website, where he has been answering questions since 2003.
10k would turn into 13,000,000,000.
(without liquidity constraints)
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(Comment before reading) thanks for this, ed RD and you are my inspirations and the vault help me learning about all 3
(After reading) thanks for the great article on one of the GOATs, specially diving deeper in his most famous quote.