Ed Seykota Trading Rules

Ed Seykota Trading Rules

Ed Seykota is one of the most success traders of his generation. As a trend follower and money manager he made many of his investors millionaires in the 1970s and 1980s. He was one of the first traders to use both moving averages and early punch card computers to backtest trend following systems. His edge captured large wins during trends and he avoided big drawdowns through excellent risk management metrics. He believes that a trader’s psychology is the most important part of operating any trading system. 

“Mr. Seykota himself has put together a money management track record with returns of roughly +60% net of fees over the three-decade span of his trading career…” -Futures Magazine

Here are Ed Seykota’s top trading rules that captures the principles he used to make millions in the markets:

  • “In order of importance to me are: 1) the long term trend, 2) the current chart pattern, and 3) picking a good spot to buy or sell.”
  • “If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.”
  • “Before I enter a trade, I set stops at a point at which the chart sours.”
  • “If you can’t take a small loss, sooner or later you will take the mother of all losses.”
  • “Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”
  • “I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.”
  • “I intend to risk below 5 percent on a trade, allowing for poor executions.”
  • “Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top”
  • “Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth. This is essential as large fluctuations can engage {emotions} and lead to feeling-justifying drama.”

Ed Seykota’s five core trading rules summed up:

Rule #1: Cut losses
Rule #2: Ride winners
Rule #3: Keep bets small
Rule #4: Follow the rules without question
Rule #5: File the news in the trash