Ed Seykota’s 21 Investment Guidelines

[Henrik Ekenberg]

Ed Seykota's 21 Investment Guidelines

1. 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. Those are the three primary components of my trading.

2. 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.

3. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.

4. 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.

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

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

7. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be risk.

8. 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.

9. 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.

10. Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.

11. Trend systems do not intend to pick tops or bottoms. They ride sides.

12. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.

13. 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.

14. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and under-capitalized, and inexperienced traders will get shaken out. Longevity is the key to success.

15. Systems don't need to be changed. The trick is for a trader to develop a system with which he is compatible.

16. 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. This seems to be part of the process of evolution and growth of a trader.

17. Trading systems don't eliminate whipsaws. They just include them as part of the process.

18. The trading rules I live by are:
   

• Cut losses.
     
• Ride winners.
     
• Keep bets small.
     
• Follow the rules without question.
     
• Know when to break the rules.
     

19. The elements of good trading are:
   

• Cutting losses.
     
• Cutting losses.
     
• Cutting losses.
      If you can follow these three rules, you may have a chance.
     

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

21. 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.