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Rich Trader Ed Seykota Interview

Van Tharp:

Have you played around with any other significant ideas in terms of position sizing besides market’s money? If so, what are they?

If you could give me ten rules to consider with respect to position sizing what would they be?

Ed Seykota:

“Playing around” with “when market money becomes your money” seems to be an exercise in math-turbation.

I don’t know what you mean by playing around with ideas. I feel you either think things through or you don’t.

Ten rules for position sizing:

1. Bet high enough to make meaningful profits when you win.

2. Bet low enough so you are ok financially and psychologically when you lose.

3. If (1) and (2) don’t overlap, don’t trade.

4. Don’t go adding a bunch of rules that don’t work, just so you have ten rules.

1% of total account capital  is the best risk profile for traders. What this means is that if you trade a $25,000 account, you can risk $250 per trade. If you have a hot stock that is about to break to new highs and you want to take the breakout, you need to set a stop loss at $250.

If you are trading 100 shares at $100 each, your stop should be at $97.50. If you are trading 250 shares at $100, then your stop would be at $99.  The volatility of the stock will determine your position size. If the stock moves $3 a day you may only be able to trade 50 shares.

Stops are an insurance policy that save you from huge losses. If you bought the $1oo stock, you would be out at your stop. This is the difference between winners and losers in the market, RISK CONTROL.

Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.” – Larry Hite.

As a trader, you will eventually lose ten times in a row. High expectancy mean reversion systems eventually lose ten time straight in a monster trend. In Las Vegas the roulette wheel hits red or black ten times in a row many more times than gamblers may think. So the question is, when that day comes do you want to be down 10%, or have your account knocked out by a 50%-70% loss? Your choice.