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ED SEYKOTA Interview by Jack Schwager (Market Wizards)

Updated: May 25, 2021

Ed Seykota - Market Wizards - Interview with Top Traders



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:

“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.

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?.

“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?”

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?”

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.

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.

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.

Thanks for listening, and as always please hit the like button and feel free to join our growing community below.

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1 Comment

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!

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