In the last video we discussed Richard Dennis – the “prince of the pit”. In this third, out of a total of seven videos presenting the Market Wizards from Jack D Schwager’s famous book with the same name, we will talk about Ed Seykota, a pioneer of computerized trading systems. Ed Seykota graduated with a double degree in electrical engineering and in management from MIT in 1969. He was then hired by a major brokerage firm where he developed the first commercially used computer trading system for managing clients money in the security markets. Seykota got frustrated with the management of the firm though, as they were interfering with the automatic decisions of his trading system on a regular basis. This acted as a catalyst for Seykota to become an independent trader instead. Much like Paul Tudor Jones, who I presented in an earlier video, Ed Seykota is crazy about keeping his losses to a minimum. When asked about the elements of good trading he answered the following: “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.” To be a long term survivor in the markets one must have great money management skills according to Ed Seykota. He says that there are old traders, and that there are bold traders, but there are very few old, bold traders. On any given trade he doesn’t want to risk more than a maximum of 5% of his equity. Although he admits that he has lost more than 5% occasionally, when major news has caused the market to jump right through he stops. This is a common mistake that can arise when being too confident about the backtesting of a trading system. Never expect that there can’t be a move which is sharper than what you’ve observed previously. The worst – and the best – moves have yet to come. This can make or break any trading system, so be sure to design your system to cope with such moves. Ed Seykota presents another idea in his interview with Jack D Schwager, which is truly provocative. He suggests that everyone gets exactly what they want out of the markets. Meaning that on balance, including the goals of a person, people lose because they want to lose, and win because they want to win. He tells a really frightening story to support his argument. A doctor friend of mine tells the story about a cancer patient, who used her condition to demand attention and in general to dominate others around her. As an experiment pre-arranged with her family, the doctor told her a shot was available which would cure her. She constantly found excuses to avoid appearing for the shot, and eventually avoided it entirely. Perhaps her political position was more important than her life. People’s trading performance probably reflects their priorities more than they would like to admit. This is a hard pill to swallow – as it implies that if you are losing money in the markets, you actually want to be a loser. And if you’re a winner, but not by any huge margins, you have put a constraint on your success yourself! I think this makes for a good topic for discussion, so I asked you guys what you think: Do you think that everybody gets what they want out of the markets? Next time we will talk about William O’Neil, the author of How to Make Money in Stocks. Stay tuned for that!