Wednesday, February 25, 2009

Ed Seykota: Market Wizard

(Yes, I'm skipping right over Gary Bielfeldt. However, while he seemed like a nice dude in the interview, his hands aren't squeaky clean according to this Forbes article. A fun read if you're familiar with the Market Wizards interview.)

Anyway, the Ed Seykota interview has been my favorite thus far in Market Wizards.

Why? Well, I appreciate anyone who can have a good sense of humor and be humble despite being richer than a cat in a fish store.  Also, the man has the ability to break trading rules down into aphorisms that stick in your head.  I've read a lot of books on Buddhism and I'm always amazed at how simple but dense some of the writing is.  A lot is conveyed in a very efficient way.

Seykota on trading is as good as Thich Nhat Hanh on Buddhism.

Okay, sure, all the humor and humility in the world isn't going to make you money if you don't have some other things working for you.  But I want to stress that developing a good sense of humor and a true sense of humility (not to be mistaken with false modesty) are very important if you hope to be a good trader.

Think of trading as a lifestyle, not just an occupation. It's longevity you are striving for, not simply riches.  Having a sense of humor and humility will help keep you in this job through difficult times.

And longevity is important.  According to Seykota, "Longevity is the key to success."

Again, I'm re-reading this book during a difficult stretch in my career, and so I tend to focus on those parts of the interviews that deal with setbacks.  But Seykota didn't even want to talk about setbacks...  the dude was just focused on the here and now and the positive future. I liked that because only by focusing on what's in front of me will I be able to move forward again.

Seykota is primarily a systems trader. He wrote some sort of trend following trading system that generates buy and sell signals, and he sticks to it. I couldn't help but wonder if this was why he was so damned cheerful and happy... he's got a goddamn robot making hundreds of millions of dollars for him.  What's not to be happy about? Still despite this fact, he had many insights that can apply to us daytrading types.

I mentioned how he doesn't like to dwell on mistakes. He moves quickly past them and focuses on the next opportunity. Obviously, this is a great skill to try and develop. When you start dwelling on past errors, you tend to want to correct them as quickly as possible. This can lead to overtrading, or taking excessively large bets in an attempt to "make back" all the money you lost.

While occasionally this might work out for you, long term, it's not a good strategy.  So, when you make a mistake, move on.

If Seykota finds himself in a trading slump, he simply limits activity.  Meanwhile, if things are going well he gets more aggressive and takes larger bets. Again, this seems very simple but in practice, it is often tough to remember. That's why reading books on trading should be part of your everyday job description as a trader.

There are many truths to trading that are obvious but also easily forgotten.  Books help you remember.

Seykota says that cutting losses is the most important element of trading. After 10 years I can't tell you how sick I am of hearing this trading axiom.  However,  it's constantly repeated because it's a very tough rule to master.

I mean, look, you're going to read these words over and over again: "cut losses short."  I guarantee it.  If there is one positive change you make today to your trading, promise yourself that you're going to read these words now, "cut losses short" and master them.  Here and now. Done.

Easy enough, right?  But in practice, when the screens are flashing and the news is spitting out of your computer speakers or worse, the television, connecting to the rules in your head is often difficult.

Always remember... trading is simple as you want it to be.

Take the small loss.  Just take it.  You can always get back in if the situation improves.  As Seykota puts it, "Losing a position is aggravating, whereas losing your nerve is devastating."

Finally, Schwager asks what a losing trader can do to transform himself into a winning trader. Seykota responds, "A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That's the kind of thing winning traders do."

In other words, adapt or die.

You need to constantly change with this game since the market is constantly changing. Don't get attached to a certain style of trading because you are setting yourself up for much pain in the long run. Instead, understand that you have to constantly reinvent the way you approach the market all the while hanging onto the core principles of trading.

Seriously, this was a great interview to read. If you are just picking and choosing through the book, be sure to spend a half hour and read this one.


Anonymous said...

musical stylings of big ed


Dinosaur Trader said...



F. G. Williot said...

Nice post.. easy for him to say, right? Maybe Seykota uses something like this.