Ed Seykota Interview: Market Wizards Trading Lessons
Updated: Nov 3
Ed Seykota Interview offers a useful case study in turning market observations into repeatable trading rules. This updated guide preserves the original Financial Wisdom analysis while separating practical lessons from exceptional results and hindsight.
Ed Seykota Interview: In This Guide
Key lessons and practical rules
The original Financial Wisdom guide and media
Evidence, limitations and risk controls
Frequently asked questions
Related guides and authoritative sources
Key Takeaways
Translate the central idea into objective entry and exit rules.
Test the method across different market regimes and include costs.
Use price, volume and market context without treating any signal as certain.
Define invalidation and position size before entering.
Original Financial Wisdom Guide
Background and Core Ideas
An Interview with a Top Trader.
Ed Seykota, named by some as one of the best, if not ‘the’ best stock trader of our time.
Ed previously maintained a low profile, until he was featured in the Market Wizard book by Jack Schwager.
He made staggering returns from the stock market, from 1972 to 1988 he turned a $5000 client account into almost $15,000,000, and had it not been for withdrawals during this time, the account would have been up several millions of percent.
In this series of interviews with top traders, we uncover Ed’s personal trading style, rules and general wisdom which have made him possibly one of the most successful, self-taught traders alive today.
Ed began his trading career during the 1970’s and was hired by a major brokerage company to help develop one of the first computerised trading systems, aimed at managing client trading accounts.
Soon however the board of management would interfere with Ed’s system, trying to squeeze out more profits and hindering the systems concept. Ed disagreed with the meddling and decided to leave to begin his own trading venture.
Like other traders we have covered, Ed was hugely influenced by Richard Donchian and his channel breakout strategy. Ultimately however Ed is known as a trend follower who has a complete understanding of the psychological aspects of trading, coupled with solid risk management.
He famously said:
Practical Checkpoint
Define the setup, entry and invalidation level before acting.
Compare the potential payoff with risk-reward planning.
Set the trade size using consistent position-sizing rules.
Rules and Practical Application
“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.”
Ed alludes to the aha moment as being the reason for price change and trend creation. For instance, consider this following series:
Which letter do you think comes next?
The puzzle and the eventual aha moment that Ed suggests, represents the creation of a trend and the eventual price change. Initially nobody knows why the price is changing, there is tension and confusion as the price rises. The price rises due to the puzzle slowly being revealed.
Eventually everyone resolves the puzzle, the confusion dissipates, and the move comes to an end.
Jack Schwager had the pleasure of interviewing Ed, but only after a recommendation from a fellow market wizard, Michael Marcus. Michael (Who was taught by Ed) himself managed to turn $30,000 into $80,000,000 over a twenty-year period.
Michael Said:
“You know, you really should interview Ed Seykota. He is not only a great trader; he is a mind”.
It is this mind that Jack Schwager interrogated, and we look to summarise the key discussion points.
Evidence Check
Is the sample broad enough to include difficult markets?
Do the results include spreads, fees, slippage and failed signals?
Could hindsight, survivorship or selective examples explain the result?
Evidence and Examples
When asked about Ed’s studies before designing his very first system, Ed said: -
“I was inspired and influenced by the book Reminiscences of a Stock Operator, Richard Donchian’s five and twenty day moving average crossover system and his weekly rule system. I consider Donchian to be one of the guiding lights of technical trading”.
Jack asked: -
“What was your first trading system?”
Ed replied:-
“My first system was a variation of Donchian's moving average system. I used an exponential averaging method because it was easier to calculate, and computational errors tended to disappear over time. It was so new at the time that it was being passed around by word of mouth as the "expedential system."
Although there have been some minor changes to Ed’s system over the years, he told Jack: -
“Systems don't need to be changed. The trick is for a trader to develop a system with which he is compatible”.
Jack continued…. What is your trading style today?.
Risk and Limitations
“My style is basically trend following, with some special pattern recognition and money management algorithms”.
Although Ed does not disclose the specific criteria of his system in the interview, I managed to get some information provided by a group member coached by Ed.
He suggested that the optimum setting for his simple breakout, trend following system is to go long only when the 80 day EMA (or exponential moving average) is greater than the 140 day EMA. This determines the trend direction of a market.
The point to enter a trade is when the close of the day is a 50 day high.
The point to close the position is when the price closes below four times the ATR (or average true range) over a 100 day period.
Interestingly, Ed told his group to steer clear of optimisations as a rule.
So why is it that Ed’s simple trend following breakout system has created so much wealth?
In an attempt to find more answers, Jack continued with his interview, asking:-
“Without divulging trade secrets, how have you been able to so spectacularly outperform standard trend-following systems?”
Summary of the Original Guide
Ed replied :-
“The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.”
“Systems trading is ultimately discretionary. The manager still must 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. These decisions are quite important, often more important than trade timing.
Jack added:-
“What is the maximum percentage of equity you will risk on any individual trade?”.
Ed Replied:-
“I intend to risk below 5 percent on a trade, allowing for poor executions. Occasionally I have taken losses above that amount when major news caused a thin market to jump through my stops.”
In a further attempt to uncover Ed’s mindset, Jack asked: -
“Very few traders have enjoyed the spectacular success you have. What makes you different?”
Summary of the Original Guide
Ed replied: -
“I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.”
Clearly Ed has enormous enthusiasm for trading, and this has no doubt helped him keep focused for several decades.
When asked “what are the trading rules you live by” Ed gave the following advice: -
One, cut losses
Two, ride winners
Three, keep bets small
And four, follow the rules without question.
Our subscribers will identify that these rules are a common theme throughout our library, and by adhering to rules 1 and 2 we create a foundation for favourable risk reward ratios, the ultimate metric for superior performance.
Summary of the Original Guide
Courtesy of portfolio manager Tom Rollinger, we found the track record of Ed’s futures trading from 1990 to 2000. On average he produced annual returns of 60%.
A theoretical $1,000 investment would have become $350,000 over the 10-year period.
We can see the drawdowns are minimal, but we can also see the importance of patience. Here there is a period of almost 3 years of stagnating performance before continuing its trajectory. How many new traders would have stuck to this system for 3 years?.....
On the topic of flat or subpar performance, jack asked:-
“How do you handle a losing streak?”
To which Ed replied:-
“I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating. Trying to play "catch up" is lethal”.
So, what did I learn from the interview and research of Ed Seykota?
Firstly, he is a trend follower and uses the breakout concept as the catalyst to enter a trade.
Summary of the Original Guide
He evidently has a simple but polished method, and this produces exceptional returns over the long run.
His philosophy is built on the foundation of sound risk management, which in turn creates excellent risk reward, a critical factor for any trading system.
A broader observation from all the interviews in the book, is that all the traders love what they do, and each one of them accepts that losing is all part of the game.
And although each are hugely successful, their methodologies are quite different, ranging from hourly charts to weekly charts, to purely technical or fundamental. However, the common similarity between all the traders is that their method suits their own personality.
Ed’s personality suits his patient, probabilistic approach, allowing time for his strategy to play out. His analytical research has given him the confidence to stick with his trend following strategy through periods of drawdown or stagnation, a trait which is not common amongst amateur traders.
I particularly like Ed’s following comment on this point, and it certainly reflects my own progress during the early years of my career.
“I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached, and the trader must quit, change, or find a new set of rules he can follow. This seems to be part of the evolution and growth of a trader”.
In summary, Ed shows trading can be kept simple. With basic risk management and patience, spectacular life changing performance can be achieved.
Financial Wisdom
Practical Limitations
Historical examples, book claims and indicator results are educational illustrations rather than forecasts. Outcomes depend on the market, timeframe, data, transaction costs, financing, taxes and execution assumptions. Test complete rules across varied conditions and define the maximum acceptable account risk before taking a position.
Put This Into Practice
These ideas become more useful when selection, entry, stop placement, position sizing and trade management form one repeatable process. The Financial Wisdom Trading Blueprint connects those decisions in a practical weekly framework.
Frequently Asked Questions
Does this strategy guarantee profitable trades?
No. It provides a framework with uncertain outcomes and must be tested with complete risk and execution rules.
What should be defined before an entry?
Specify the setup, trigger, invalidation level, position size and conditions for managing or exiting the trade.
Further Reading
References and Further Reading
Educational information only. Trading and investing involve risk, including the possible loss of capital. Examples are illustrative, not guarantees of future performance, and nothing in this article is personalised financial advice.
About the Author
Written by Gareth, MBA
Gareth, founder of Financial Wisdom, has more than 30 years of personal trading experience. He competes in the United States Investing Championship, creates award-winning trading content and has been featured in Technical Analysis of Stocks & Commodities.
Hmm... “Systems don't need to be changed. The trick is for a trader to develop a system with which he is compatible”.
I'm left pondering what exact system is compatible with a strategic type trader who naturally challenges the status quo and may be a bit of a maverick! This is a rhetorical question, so no need to waste your time in replying...
Just let me ponder a while longer!