It’s no secret that the Forex market has changed incredibly over the past few decades. Technological evolution has changed trading for good, but few know the people who stand behind this progress. Have you ever heard of Ed Seykota, an illustrious trader who brought IT solutions to Forex trading? His returns on capital compare to those achieved by Warren Buffett, George Soros, and William J. O’Neil. No doubt, he is one of the gods of trading.
Edward Arthur Seykota was born in 1946 in the Netherlands, but at an early age, he immigrated with his family to the United States. His father tried stock trading and eventually became his son’s first trading mentor.
Ed had his first trade at the age of five, in Portland, OR. His father gave him a gold-colored medallion - a sales promotion trinket. He traded it to a neighbor kid for five magnifying lenses and felt as though he had participated in a rite of passage. He started early with technical analysis, too. By the time he was nine, he had a bedroom filled with old radios, test equipment, and oscilloscopes. Ed liked to generate and display waveforms. Later, when he was 13, his father showed him how to buy stocks and explained that he should buy when the price broke out of the top of a box and to sell when it broke out of the bottom. That's how Ed Seykota got started.
In 1969 he graduated from MIT with degrees in electrical engineering and management.
Once, he read an article by technician Richard Donchian that really intrigued him. Donchian demonstrated how a diversified simple five- and 20-day moving average crossover system made а respectable rate of return. The idea of an automatic money making machine fascinated Edward. So he bought some block time at a local computer service, spent his evenings punching cards from The Wall Street Journal, and began to reproduce Donchian's results. He tried varying the parameter sets and found that other combinations also worked. He also noticed that longer-term smoothing worked pretty well, while transaction costs seemed to chop up shorter-term systems. That’s how the future trading guru got introduced to technical analysis.
Ed Seykota began his trading career in the 1970s, when he was hired by a major brokerage firm. It was there that Ed developed one of the first commercialized trading systems for managing money in the futures market. Ed went in on weekends to use the IBM 360/65 accounting mainframe to run tests. He punched cards and ran batch jobs in FORTRAN 4. He managed to test four types of systems on about 50 different parameter sets on eight commodities, going back a decade. It took him half a year.
Eventually, the brokerage company packaged a product based on his research. The problem was, his boss was unable to follow the system and was more interested in souping it up to generate more commissions. Ed told them that their best move was to make money for their customers. No sale! Not only that, his boss refused to give him 10% of the commissions generated from the system. So, Ed decided to leave.
At age 23, Ed Seykota went out on his own with about a half-dozen accounts in the $10 000 - 25 000 range. As of mid-1988, one of his client accounts, which was started with $5000, was up over 250 000% on a cash-on-cash basis. Normalized for withdrawals, the account would have been up several million percent. Those are truly staggering results.
Keep in mind that those figures spanned more than a decade of trading, so this was not a fluke or some lucky win streak. Ed Seykota is a huge believer in rules. Everything he does is based on strict trading rules he’s outlined for himself. It’s how he manages to stay calm even when things aren’t going his way.
Seykota’s five most cherished trading rules:
1. Cut losses
Protecting your capital is your primary job as a trader. Making money comes second. Embrace trading losses. That means accepting a loss the moment the market invalidates your trade idea.
If you make the mistake of hoping for the market to turn around in your favor, you’ve already lost. The best way to embrace trading losses is to have a plan. Combine that with small bets and you’ll be light-years ahead of other Forex traders.
2. Ride winners