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Yes, Give it to me

Ed Seykota: 19 Trading Lessons from a Market Wizard 

Last Updated: October 28, 2020

By Rayner

Ed Seykota is one of the best Trend Followers of our time.

According to Michael Covel, in his book Trend Following, Ed Seykota turned a $5000 into $15,000,000 over a 12-year period.

That’s insane, right?

With such a mind-blowing track record, I dug further to find out what are some lessons we can learn from Ed Seykota.

Now…

I took an afternoon to piece everything together, and finally, I’ve distilled 19 of his best trading lessons into one blog post (with my own commentaries and insights).

And after you study the lessons, you’ll probably get a few “AHA” moments that could take your trading to the next level.

You ready?

Then let’s get started…

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.

Here’s the thing:

You don’t want to hit the buy button just because you spot a bullish Hammer (or some indicator is “oversold”).

Those tools don’t tell you what the market is doing.

If you want to read the market, ask yourself…

  1. What’s the long-term trend?
  2. Any chart pattern that’s forming?
  3. Where is an area of value to trade from?
  4. Who’s winning, buyers or sellers?

And only then, you pick a spot to buy or sell.

Now, I don’t know what chart patterns Ed Seykota looks for.

But for me, I like to trade bullish chart patterns (like Ascending Triangle, Bull Flag, buildup at Resistance, etc.) in an uptrend.

Here’s an example: An Ascending Triangle in an uptrend

Ed Seykota

Another example: Bull Flag in an uptrend

If you want to learn more, then go check out my chart pattern trading strategy guides below…

The Bull Flag Trading Strategy Guide

The Head and  Shoulders Pattern Strategy Guide

The Cup and Handle Trading Strategy Guide

I set protective stops at the same time I enter a trade. I normally move these stops to lock in a profit as the trend continues.

As a trader, you never know if the next trade will be a winner or a loser.

That’s why you have a stop loss to protect your downside — so you don’t lose everything in one trade.

At the same time…

You never know how much further the market can move in your favor.

Another 10%, 100%, or 10,000% like Bitcoin?

So here’s the lesson…

If you want to ride big trends in the market, you must trail your stop loss and give the market a chance to “pay you even more”.

Now if you’re not sure how to do it, then go watch this training video below…

Moving on…

Before I enter a trade, I set stops at a point which the chart sours.

Here’s the thing:

When you put on a trade, you must know when to get out if you’re wrong.

You want to ask yourself…

“Where on the chart will the price “destroy” my trading setup?”

Once you’ve identified the level, that’s where you should put your stop loss.

Here’s an example:

Let’s say you buy on a breakout.

And if the price falls back into the range, it means you’re wrong and you should exit the trade.

Here’s what I mean…

Ed Seykota

This concept can be applied whether you’re trading breakouts, pullback, reversal, etc.

If you want to learn more, then check out this training video below…

The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.

Here’s a fact:

The market is always changing.

It moves from a period of low volatility to high volatility, trend to range, etc.

This means no trading strategy will work all the time.

Your strategy might work for a while, and then stop working when market conditions change.

So, what can you do?

Here are a few suggestions…

1. Ride out the drawdown

For example, I’m a Trend Follower and I make most of my money in trending markets.

But what if the market is in a range?

Well, that’s where I have proper risk management so I can survive the “tough times”.

I’ll play good defense and ride out the drawdown till market conditions are in my favor.

2. Adapt to different market conditions

You can adapt your trading strategy to different market conditions.

For example…

If the market is choppy with no clear direction, stay out.

If the market is in a range, you can “buy low and sell high.”

If the market is in a low volatility environment, you can look to trade breakouts.

And etc.

Risk control has to do with your willingness to allow your stop to do its job.

You have a trading plan.

You know where to put your stop loss.

You know you must follow your rules.

But…

When you’re trading live, you interfere with your stop loss.

When the price moves against you, you quickly exit the trade to minimize the loss — even if the price hasn’t hit your stop loss.

Does it make sense?

Heck no!

Remember, your stop loss is placed at a level that if reached, will invalidate your trading setup.

If you interfere with your stops, it means you’re exiting the trade prematurely and not giving it a chance to “prove itself”.

The outcome?

You suffer from a death of a thousand cuts.

But if you followed your rules, some of these losses will be huge winners — that puts you in the green.

So, here’s the bottom line…

Respect your stops and trust it’ll do its job.

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.

Let me ask you…

How would you feel if you’re trading a $1,000,000 account?

That seems like a lot, doesn’t it?

But if your net worth is $10m, does $1,000,000 still seem a lot?

Probably not.

And this is the point Ed Seykota is trying to make.

You want to risk an amount that’s small relative to your net worth so you’re better able to withstand the swings in your equity curve.

Why?

Because if you risk too much, you’ll be glued to the screen watching every tick in the market — and you’ll exit your position at the slightest sign of reversal.

So now the question is…

How much of your net worth should you risk?

Well, there’s no right or wrong answer here.

But as a guideline…

Risk an amount which you can sleep soundly at night and still provide a return that matters to you.

For me personally, I’m willing to speculate 50% of my net worth on trading.

Reliance on Fundamentals indicates a lack of faith in trend following.

As a Trend Follower, the only thing that matters is the price.

Rumors don’t matter.

Opinions don’t matter.

Fundamentals don’t matter.

Here’s why…

  1. Fundamentals can go against price (stock go up on bad news)
  2. By the time fundamentals is out, it’s usually too late to enter
  3. It’s difficult to manage your risk based on fundamentals

I’ll explain…

1. Fundamentals can go against price (stock go up on bad news)

Have you ever seen a stock goes up on bad news?

Or, a stock goes down on good news?

This is an example of fundamentals going against price.

Yes, you might analyze fundamentals “correctly” but, it doesn’t mean the price will move in your favor.

You could still lose money being “right”.

Now…

Do you want to be “right” or do you want to make money?

Because if you want to make money, I’d rather you follow price.

2. By the time fundamentals is out, it’s usually too late to enter

Let me ask you:

Have you ever received a “hot tip” from a friend, media or forum?

And when you look at the price, the market has exploded higher.

However, you still buy the stock hoping it’ll go up.

And then what happens?

The market does a 180-degree reversal (and you’re long the highs).

Ouch.

So here’s the thing…

Trading on news, tips, or rumors is a bad idea.

Because you’ve no idea when the news was first leaked out, and by the time it reaches you — it’s too late.

The smart money has bought and is now looking to unload their shares to the dumb money — don’t be one of them.

3. It’s difficult to manage your risk based on fundamentals

If you’re a technical trader, it’s EASY to manage your risk

All you need to do is…

  1. Calculate your stop loss
  2. Position size accordingly

But if you trade based on fundamentals, where do you put your stop loss?

You probably won’t even use a stop loss because as the price move against you, the stock will become “cheaper” — and it’s even more attractive now.

And there lies the problem, when will you exit your trade?

After the fundamentals turn bad?

Well, when that happens, you could lose a huge chunk of capital on just one trade.

So, this is something you must consider if you’re trading based on fundamentals.

I usually ignore advice from other traders, especially the ones who believe they are on to a “sure thing”. The old-timers, who talk about “maybe there is a chance of so and so,” are often right and early.

Trading is all about probabilities.

This means you’ll never be 100% correct, and instead, likely to be wrong more often than not.

So when you hear words like “guaranteed”, “for sure”, and “100%” — stay far away from the person spouting it.

It’s likely he’s trying to sell you something.

If you want to detect a pro trader, he’ll use words like…

  • Potential
  • Possibly
  • Probably
  • Might be
  • Perhaps

I know it sounds vague, but that’s a hallmark of a pro trader.

You’re never certain and don’t get married to an idea (or position).

Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up.

Pyramiding your trade refers to add in new positions as the market goes in your favor.

It sounds sexy as you can milk a lot of profits if you catch a trend.

But here’s the thing:

More often than not, it’s not going to happen.

So, when you’re pyramiding your trades, you want to be conservative.

You don’t want to pyramid your trades aggressively, or else when the pullback comes, you’ll lose everything (and more).

So here’s how you can do it…

1. Have open profits of at least 2R

Because if the market goes against you, you have a “buffer” to withstand the pullback.

If you have no open profits and you scale in your trade, you might lose more than intended.

2. Scale in your winners with reduced risk

Next, you can use the Donchian Channel breakout as an entry trigger.

Now, you don’t want to risk 1R on your later trades because you could lose all your open profits (when the market does a pullback).

Instead, scale in with 0.5R (or less).

This lets you better withstand the pullback and still earn a larger profit if the market moves in your favor.

3. Determine your exit

Lastly, you must know where to exit your positions.

Will you exit all at once or treat each position as a new trade?

In my experience, it’s easier to exit all positions when your trailing stop is hit and then “restart” all over again.

Here’s an example:

Ed Seykota

Having a quote machine is like having a slot machine on your desk — you end up feeding it all day long. I get my price data after the close each day.

In the early days of trading, you have no computer where you can easily get the price of a stock.

Instead, a quote machine tells you the price (and it’s usually delayed).

Anyway, the point is…

If you watch the price all day long, you’ll get excited by the little fluctuations — and might place trades you won’t have otherwise taken.

That’s why Ed Seykota is an end-of-day trader who trades the higher timeframe (and ignores the “noise” on the lower timeframe).

Next…

The manager has to 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.

Imagine:

You’re running a restaurant business.

Do you just focus on the food?

Of course not.

You’ll think about your accounting, ambiance, service, workers, customers, etc.

And it’s the same for trading.

You don’t just focus on the entry.

There are other things to consider like…

  • How much you’ll risk per trade
  • How you’ll manage your trade
  • How you’ll exit your winners
  • How you’ll exit your losers
  • Which markets to trade
  • And etc.

Now, it’s not within the scope of this article to go through every one.

So if you want to learn more, go read this post The Complete Guide to Becoming a Consistently Profitable Trader.

Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system user’s increases and the markets shift from trending to directionless, these systems become unprofitable, and undercapitalized and inexperienced traders will get shaken out. Longevity is the key to success.

Trend Following is a simple concept.

You trade many markets, cut your losses, and ride your winners.

However, it’s NOT easy to execute.

Why?

Because the market doesn’t trend often.

This means you’ll be in a drawdown most of the time.

And if you don’t manage your expectations, you’ll conclude that Trend Following doesn’t work.

That’s why you often see articles like…

“Trend Following is dead.”

“Trend Following doesn’t work anymore.”

“You can’t make money with Trend Following.”

But here’s the kicker…

It’s a matter of time before Trend Followers ride massive trends and these articles are proven wrong, again.

So here’s the bottom line:

It’s not enough to find a strategy with an edge.

You must also have the conviction and the discipline to execute your strategy consistently.

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 has to quit or change or find a new set of rules he can follow.

I know this sounds cliché.

But, you must find a trading strategy that suits you.

For example…

Are you a trader that loves fast action? Then momentum trading might be for you.

Or, are you a trader that prefers to buy low and sell high? Then mean reversion trading is better for you.

Or perhaps, you’re the trader that loves fast “action”. Then, short-term trading is for you.

The bottom line is this…

There’s no “best” trading strategy out there.

It’s all about knowing yourself so you can find a trading strategy that suits you best.

Make sense?

Great!

Trading Systems don’t eliminate whipsaws. They just include them as part of the process.

I seldom use the word guarantee when it comes to trading.

But one thing I can GUARANTEE you is this…

Every trading system has whipsaws.

Look:

I don’t care what system you’re trading (whether it’s mean reversion, Trend Following, etc.).

But it’ll make money only in certain market condition.

And when the markets change, it’ll go into a whipsaw (otherwise known as a drawdown).

Now…

A new trader will make the mistake of concluding the system doesn’t work and jump onto the next best thing.

But a professional trader understands this and will manage his risk and ride out the drawdown — till the market condition is favorable again.

If you can’t take a small loss, sooner or later you will take the mother of all losses.

Here’s the thing:

Every BIG loss you’ve suffered started from being small.

And then it snowballs…

Snowball…

Snowball…

Snowball…

…into one huge F****** loss.

I know.

It’s tempting to avoid the loss because the market usually reverses back.

But here’s the thing:

All you need is one time for the market NOT to reverse — and you’re shit out of luck.

So really.

The best loss to take is when it’s still small, not when it’s so damn huge that it destroys your trading account.

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.

Let me ask you:

Have you ever suffered a loss which you felt it isn’t your fault?

And you want to recoup back your losses and to “get even” with the markets.

So, what do you do?

You revenge trade.

You put on trades outside of your trading plan — hoping to quickly “win” back your losses (and show the market who is the boss).

But somehow, the market knows what you’re thinking and refuse to give in.

So, the next trade is a loser from the start.

Now at this point, you’re fired up!

You want to make everything back in one trade — and more.

So, you double down hoping to catch a winner and make everything “alright”.

But, you’re out of luck as the market continues to prove you wrong.

And when you can no longer withstand the “pain”, you exit all your positions only to realize that you’ve blown up a huge chunk of capital.

Ouch!

So, what’s the lesson here?

As a trader, you’ll regularly encounter drawdowns.

There’s nothing personal between you and the market.

The only thing that’s personal is between you and yourself.

So, when you know you’re taking a “beating” from the markets, walk away.

Because the last thing you want to do is play “catch up” and break all your rules which were meant to protect you.

Remember, the market will always be there. But if you go “crazy”, your account might not be.

One alternative is to keep bets small and then to systematically keep reducing risk during equity drawdowns. That way you have a gentle financial and emotional touchdown.

Here’s how it works…

Let’s say in normal times you risk $500 per trade.

But right now, you’ve lost your “mojo” and you’re in a losing streak.

If you continue trading, your account might go deeper in the red.

So what now?

Well, one alternative is to stop trading as mentioned earlier.

Now, this approach might not suit everyone because some of you still want to continue trading.

So, what you can do is reduce your risk.

For example:

You can risk $100 per trade (instead of $500).

This way, even if you continue losing, the losses are small.

And when you regain back your confidence and losses, you can scale up back to your original $500 per trade.

Does it make sense?

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.

Here’s the thing:

A winning trader has nothing to do with intelligence, luck, or account size.

Instead, a winning trader…

  • Have a trading plan
  • Trades with an edge
  • Follows a proven process
  • Has a proper risk management
  • Focus on the process, not on the results
  • Have the right expectations about trading

Clearly, there’s a lot to do if you want to be a winning trader.

Can it be done?

Of course!

Is it easy?

Heck no.

But, if you want it bad enough, you’ll find a way or, you’ll find an excuse.

You can learn more here: How to Become a Professional Trader (The Complete Guide)

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.

Here’s the truth:

As a trader, you’ll be wrong often — and that’s okay.

Why?

Because it’s not about how often you win (or lose).

Rather…

It’s how much you lose when you’re wrong and how much you win when you’re right.

That’s what matters!

For example:

  • You have a win rate of 30%
  • You risk 1% of your account on each trade
  • You earn an average of 1 to 3 risk reward ratio

And here are the results of your next 10 trades…

Lose Lose Lose Lose Lose Lose Win Lose Win Win

The result?

-1%, -1%, -1%, -1%, -1%, -1%, +3%, -1%, +3%, +3% = 2%

Now even though you’re wrong 70% of the time, you still made a return of 2%.

And that’s only possible because you cut your losses.

So, if you want to stand a chance of becoming a profitable trader — cut your losses.

Frequently asked questions

#1: Wow Rayner, do you actually speculate 50% of your net worth on trading? Or do you mean 5%?

Yes, I do. So let’s say my net worth is $100,000, I’m actually willing to use up to $50,000 to fund my trading account.

It doesn’t mean that I’m using $50,000 on each trade. Instead, I’m risking 1% of my trading account for each trade which will only be $500 risk per trade.

#2: How do I know when the market is in a low volatility environment to look to trade breakout?

You can look at the ATR indicator and wait for the volatility of the markets to reach multi-year lows.

Now if you want to discover how to use this powerful indicator, then check this out.

Conclusion

And there you have it!

The 19 best trading lessons from a legendary Market Wizard — Ed Seykota.

Now here’s my question to you…

Which is your favorite trading lesson from Ed Seykota?

Leave a comment below and share your thoughts with me.

  • “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 has to quit or change or find a new set of rules he can follow.”

    I don’t agree with this. If a trader has written a rule based plan for the style of trading they do as well as having the plan be specific to the instrument they are trading then I cannot see ANY reason to change especially if you are consistently profitable.

    Only beginners jump around like that because they have been conditioned to think they can make easy money. They have some losses and immediately think their plan isn’t working so they jump to another instrument but have not developed a rule based plan FOR that instrument. They repeat this cycle over and over until they burned their mind out and perhaps even blown out their trading capital account, it happens all the time. Don’t be THAT trader!

    I hope this helps

    Good luck with your trading and investing and remember: Trade smart…OR JUST DON’T TRADE!

    Stock Trading Blogger

  • damn, i just prayed that i may find what ive been looking for, because i was devastated on my trades recently. and this will help me to reorganize my self as a trader. thank you rayner, keep up the good work, may God bless you always

  • Just to clear things out regarding a series of wins / losses en terms of %:
    “-1%, -1%, -1%, -1%, -1%, -1%, +3%, -1%, +3%, +3% = 2%”

    Well actually no, if you start with a capital of say 100, you end up with 1.8%. You don’t add percentage changes, you multiply them. I know you know that, but it’s a common mistake and can lead newbies to errors in account growth expectations.

  • I’ve always enjoyed reading charts, however I’ve never actively traded. Trend trading seems to suit me as a person, the more I read. Great read rayner.

  • Hi Rayner! you said that “”For me personally, I’m willing to speculate 50% of my net worth on trading””? Really? 50% or 5%?

  • Cut your loses
    Cut your loses
    Cut your loses

    And have and edge in the markets with a good risk to reward ratio.

    That was my best take away

  • Hello Sir.. I must say that your explanations are the best so far. You have made me understand forex to a great extent.

    Please how do I know when a market is in low volatility to know when to trade breAkout

  • hey Rayner , a big fan from India .
    I just want your help in EMA … I can’t understand how to setup this one

  • Nice article on fundamentals of trading and cutting losses earlier before emotions prevails. The secret sauce is how to get your edge bring the winner and repeat the process. Thanks Ryan for great insights

  • Hey Rayner you are a good teacher. You changed my poor analysis to better one. All i need to learn more is about moving average strategy and RSI indicator. Please help me.. I understand it that any strategies.

  • I have been struggling with taking losses and when he sealed it with this example of losing small that was a game changer.

    Also, this issue of using the trail stop loss, because I have been taking profits too fast and find that the market is still favouring me but I took my profits early, but the market could still give me my profits.

    I have learnt to take my losses early than to risk everything on a single trade.

    I want to practice that system and master it.

    Thanks very much Teo, I have learnt more from this one also.

  • That was excellent Raynor! So many great messages in this to learn from and keep in mind. I learn a great deal from your detailed and clear articles thanks for your time! Im new to trading and soaking up everything I can before I trade more heavily. Cheers mate!

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