Ed Seykota Trading Strategy and Quotes: Wisdom of a Trend-Following Wizard
Anyone reasonably interested in trading and speculating has probably heard about Ed Seykota. He was first featured in Jack Schwager’s Market Wizards. It’s the most memorable interview in the whole series, in my opinion, not only because he’s very direct, but also because he is unique in his thinking and how he expresses the most important elements of trading.
Ed Seykota is famous for his trend-following strategies – he is regarded as the trend follower wizard and father of computerized trading. In this article, you get a brief story of his life and some of his most interesting quotes (taken from different sources). Unfortunately, Seykota has been quite secretive about his trading strategies, except that he is a trend follower.
I recently reread the interview in Market Wizards and Micheal Covel’s Trend Following. In the latter book, Covel has covered Seykota extensively and is mentioned throughout the whole book. Seykota might be a very good trader and investor, according to Covel he made 60% annually from 1990 to 2001, but Seykota has the knack of expressing the vital part of trading into very amusing metaphors. Moreover, Seykota is also multitalented -just look at some videos on YouTube where he is singing and playing the guitar.
Who is Ed Seykota?
Born on August 7 of 1946 in the Netherlands, Ed Seykota was the pioneer of the trading system (computerized trading) for the futures market in 1970. Most of the concepts he used in trading were taught to him by his father, a stock trader.
He graduated from MIT and MIT Sloan School of Management, where he earned S.B degrees in Electrical Engineering and Management, both in 1969. Seykota used early punched card computers to test his ideas of computerized trading in the market. He’s often regarded as the “father of commercial computerized trading.” He was one of the pioneers in mechanical trading and developed his trend-following systems in the 1970s:
He became interested in computerized trading systems after reading a letter by Richard Donchian on five- and 20-day moving average strategies and on utilizing mechanical trend following systems for trading. From then on Ed Seykota’s trading strategies have been all about trend-following. The Reminiscences of a Stock Operator by Edwin Lefèvre was another source of inspiration for him. Seykota developed his first trading system based on exponential moving averages. He would spend evenings at the local computer service trying to reproduce the results achieved by Richard Donchian. It would go on to become an exciting tool for technical analysis.
In 1970, He got a job at a brokerage firm; this marked the beginning of great history for him. Seykota honed his trading system over time, adopting a more flexible approach rather than the rigid system he started. He introduced more rules and criteria into the system in addition to money management algorithms and pattern triggers.
Though the brokerage firm adopted his research and built a model on it, he was in dispute with the top management. Therefore, at the age of 23, he left the brokerage firm. Seykota walked out with close to a dozen accounts ranging from $10 000 to $25 000. He converted $5000 into $15 million over twelve years in his account.
His genuine love for trading and his optimistic conduct sustained his success which continuously improved his trading style. However, he didn’t change his approach to indicators. Instead, he filters out the market noise.
In the famous book Market Wizards, Ed Seykota was interviewed, and this is what he had to say:
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
In 1992, Seykota organized a group of traders to evaluate their emotions — to verify that traders often allow their emotions to interfere in their trading decisions. These started meeting regularly, and Seykota used data collected to develop methods to support personal development. And in the following years, this gathering expanded to include people from other professions with members.
As a trend trader, Seykota prefers technical analysis. He noted that he looks out for three fundamental components in his trading style: identifying the right time to buy and sell, long-term trends, and chart patterns which he says are the basis of analysis. He places his stop losses immediately after opening a position and takes profit if there was a downturn in the market.
Seykota resided in Incline Village, Nevada, on the north shore of Lake Tahoe, but recently moved to Texas. Apart from trading, Seykota was interested in science and mathematics.
Throughout his career, he has kept a low profile and only occasionally managed money for other people. He’s a proponent of process over outcome, as you’ll see from the quotes below. We are sure he likes Annie Duke’s Thinking In Bets.
Ed Seykota’s trading rules
Ed Seykota’s trading strategies use mechanical trading rules (backtest) with no human discretion whatsoever. He has labeled himself as a trend follower, but this is of course a very wide and vague description.
He started in the 1970s by using moving averages and we suspect he is still using them. However, we have not managed to find any meaningful resources as to what his main strategies are today.
Relevant helpful articles:
- Free trading strategies
- Subscribe to our Monthy Trading Edges
- Trend following strategies and systems explained
- A simple trend-following system/strategy on the S&P 500 (By Meb Faber and Paul Tudor Jones)
- Trend-following system/strategy in gold (12-month moving average)