Ed Seykota: A Legendary System Trader - Trading Tuitions (2024)

“I don’t implement momentum, I notice it and align my trading with it.”

-Ed Seykota

Ed Seykota needs no introduction when it comes to investment and services. This trader held one of the best records of all time for any trader. His returns on capital matched to likes of Warren Buffet, William J. O’Neil or George Soros. Born on August 7, 1946, in the U.S. Ed Seykota is a commodities trader and earned a degree in Electrical Engineering from MIT and another in Management from the MIT Sloan School, well, both in the year 1969. His conviction in Algorithmic Trading using the rules of technical analysis made him greatest legends of all time in this field.

This trader was the trendsetter for the path-breaking System Trading. He turned $5000 into $15 million over a 12-year span in a client account. He boasted of a long-term performance, as is clear from his statement, “The markets are the same now as they were five to ten years ago because they keep changing – just like they did then”. Another statement from Seykota justifies the cause, where he said, “Longevity is the key to success” A majority of Ed Seykota’s achievements were attributed to his utilization of computerized trading systems. He even managed to get the brokerage firm he had been working for, adopt his trading system.

There’s much to learn from Ed Seykota when it comes to making an investment and deciding whether the stock is a ‘buy or ‘sell’. He spoke of a differentiated strategy on the basis of a ‘bullish’ or ‘bearish’ trend. For technical analysis, he followed a three-point strategy, which is,

• Analyze the long-term trend
• Study the current chart pattern
• Find a good spot to buy or sell.

For Seykota, trading is an art which requires the skill and patience to read the markets and manage your own emotions and anxieties. For example, if you made 5 trades and you incurred a 1% loss on each of them, recursively, you were down by 5%. The next trade you decide to make, at a 5% risk would deliver 10% on being successful. However, overriding emotions over logic, if the investment is made without effective study and it doesn’t turn out to be as expected, and now, you are down by 10%.

Ed Seykota had a definite approach for it as well. He speaks of small investment decisions with speculations less than 10% of your liquid net assets. The fluctuations are hence measurably marginalized relative to the net worth. Some points are worth noting when it comes to managing risks according to Seykota.

• Risk cannot be quantified exactly. If it could, it would no longer be a risk.
• If you rely on Fundamentals, it indicates a lack of faith in trend following.
• Limit your risk to the extent where you can afford to lose. Yet again, risk enough to make the win meaningful.

Ed Seykota believed that the profitability of trade repeated itself over cycles. The popularity of trend-following systems is directly proportional to the success rate, and vice-versa. Hence if you are a trader, you don’t need to reformulate your investment strategy. Rather, the trick to long-term success is developing a compatible system. The trading system is an agreement between yourself and the markets. Make it count.

Below are some of the excellent motivational quotes from Ed Seykota:

• “There are old traders and there are bold traders, but there are very few old, bold traders.”
• “Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change.”
• “Luck plays an enormous role in trading success. Some people were lucky enough to be born smart, while others were even smarter and got born lucky.”
• “If you can’t take a small loss, sooner or later you will take the mother of all losses.”
• “If you can’t measure it, you probably can’t manage it… Things you measure tend to improve.”
• “Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.”
• ” If I am bullish, I neither buy on a reaction nor wait for strength; I am already in. I turn bullish at the instantmy buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.”
• ”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.”
• “Trend systems do not intend to pick tops or bottoms. They ride sides.”
• “Trading Systems don’t eliminate whipsaws. They just include them as part of the process.”

Everyone in the trading community must be obliged to Sir Ed Seykota for his immense contributions in the field of Algorithmic Trading. He must be overwhelmed to see that the theories he pioneered is in practice these days.