ED SEYKOTA

Think and Trade Like Ed Seykota

Ed Seykota is a legendary trader known for his pioneering work in computerized trading systems and his exceptional track record as a trend follower. His trading philosophy revolves around discipline, risk management, and understanding market psychology. Seykota’s rules are simple but powerful, emphasizing systematic trend-following and emotional control. Let’s explore how you can think and trade like Ed Seykota, using his most famous quotes as guiding principles and real-life examples from his trading career.

1. “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.”

This quote encapsulates Seykota’s systematic approach to trading. He follows strict rules but is flexible enough to adapt when necessary. His disciplined framework involves cutting losses quickly, letting winners run, and managing risk by keeping position sizes small.

Example: Seykota’s trend-following system automatically triggers stop-loss orders when trades go against him. This disciplined loss-cutting approach helped him avoid catastrophic losses, protecting his capital and allowing him to ride trends for maximum gains.

2. “If you can’t measure it, you probably can’t manage it. Things you measure tend to improve.”

Seykota emphasizes quantitative trading and performance analysis. He meticulously measures his trading outcomes, risk, and system effectiveness to optimize his strategy.

Example: Seykota was one of the first traders to use computer models for backtesting his trend-following systems. By measuring historical performance and refining his algorithms, he consistently improved his trading results.

3. “If you can’t take a small loss, sooner or later you will take the mother of all losses.”

Cutting losses quickly is fundamental to Seykota’s strategy. He believes that traders who can’t handle small losses eventually face massive drawdowns because they hold on to losing positions for too long.

Example: In the 1970s, Seykota avoided significant losses during commodity market corrections by sticking to his stop-loss rules, preventing minor setbacks from becoming disastrous losses.

4. “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.”

Seykota repeats this rule to emphasize its importance. He understands that preserving capital is more critical than chasing profits. By minimizing losses, he stays in the game long enough to capture large winning trades.

Example: During volatile market swings, Seykota’s system quickly exits losing trades, preserving capital and reducing emotional stress. This disciplined approach allows him to stay focused and prepared for the next opportunity.

5. “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.”

Seykota highlights the psychological aspect of trading. He believes that traders unconsciously fulfill their emotional needs through their trading behavior, whether it’s excitement, fear, or self-sabotage.

Example: Seykota observed that traders who seek excitement often take impulsive risks and lose money. In contrast, disciplined traders who genuinely aim for consistent profits design systems that align with their financial goals.

6. “Risk no more than you can afford to lose, and also risk enough so that a win is meaningful.”

Balancing risk and reward is central to Seykota’s strategy. He sizes his positions carefully, risking enough to make meaningful gains but never so much that a loss would be devastating.

Example: Seykota typically risks about 1-2% of his capital per trade, allowing him to survive losing streaks without significant drawdowns. This conservative approach helps him maintain emotional stability and long-term profitability.

7. “It can be very expensive to try to convince the markets you are right.”

Seykota avoids the ego trap of trying to be right. He understands that the market is always right, so he follows his system’s signals without second-guessing.

Example: In his trend-following system, Seykota exits positions as soon as the trend reverses, even if he believes the fundamental narrative is still intact. This discipline prevents emotional attachment and minimizes losses.

8. “Trend following is an exercise in observing and responding to the ever-present moment of now.”

Seykota focuses on price action and momentum, staying in the present rather than predicting the future. He follows trends as they develop and adapts to market changes in real time.

Example: During the gold bull market in the 1970s, Seykota rode the trend upwards without predicting price targets. When the trend eventually reversed, his system signaled an exit, locking in substantial profits.

9. “A lot of people would rather understand the market than make money.”

Seykota prioritizes profitability over intellectual satisfaction. He focuses on trading systems that make money rather than trying to explain market movements.

Example: By relying on trend-following signals instead of economic theories, Seykota avoided the trap of over-analyzing market fundamentals, allowing him to capitalize on price momentum effectively.

10. “Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.”

Seykota emphasizes the importance of trading psychology. A good system should align with the trader’s personality, risk tolerance, and emotional strengths.

Example: Seykota’s trend-following system suits his patient, disciplined temperament. Other traders who tried to copy his system without matching his psychological profile failed to achieve similar success.

11. “Trying to trade during a losing streak is emotionally devastating. Trying to play ‘catch up’ is lethal.”

Seykota advises traders to take a break during losing streaks to avoid emotional decision-making and revenge trading.

Example: During challenging market conditions, Seykota would reduce his position sizes or take a temporary break, allowing himself to reset mentally before returning to the market.

12. “Psychology motivates the quality of analysis and puts it to use. Psychology is the driver and analysis is the road map.”

Seykota understands that a trader’s mindset influences decision-making. He integrates psychology into his system, ensuring that his emotions don’t interfere with his strategy.

Example: By following his system’s rules without question, Seykota minimizes emotional bias, maintaining a disciplined and objective trading approach.

Applying Seykota’s Wisdom in Your Trading Strategy

To think and trade like Ed Seykota, you need to:

• Follow Trends: Identify and ride price trends while avoiding predictions.
• Cut Losses Quickly: Use stop-losses to minimize losses and protect capital.
• Manage Risk: Keep position sizes small and balanced.
• Understand Yourself: Develop a trading system that suits your personality.
• Maintain Emotional Discipline: Stick to your system regardless of market noise.

Final Thoughts: Becoming a Successful Trader

Ed Seykota’s trading philosophy is built on discipline, risk management, and psychological awareness. His success shows that trading isn’t about predicting markets but about following trends, managing risks, and controlling emotions. By internalizing Seykota’s principles and developing a system that suits your personality, you can navigate market volatility and achieve consistent profitability.

Think like Seykota, trade like Seykota, and let the power of disciplined trend-following lead you to trading success.