The following story passed along from an associate is “pure Seykota”:
“I attended a day-long seminar in February 1995 in Toronto, Canada where Seykota was one of the guest speakers. The WHOLE audience peppered Seykota with questions like: Do you like gold, where do you think the Canadian $ is headed, how do you know when there is a top, how do you know when the trend is up etc.? To each of these, he replied: ‘I like gold—it’s shiny, pretty—makes nice jewelry’ or ‘I have no idea where the Canadian dollar is headed or the trend is up when price is moving up, etc.’ His replies were simple, straight-forward answers to the questions asked of him. Later, I learned through the event organizer that a large majority of the audience (who paid good money, presumably to learn the ‘secrets’ of trading from a market wizard) were not impressed. Many felt they had wasted their time and money listening to Seykota. Seykota’s message couldn’t be clearer to anyone who cared to listen. The answers were found in the very questions each person asked. Don’t ask, ‘How do you know the trend is moving up?’ Instead, ask, ‘What is going to tell me the trend is up?’ Not, ‘What do you think of gold?’ Instead, ask, ‘Am I correctly trading gold?’ Seykota’s answers effectively placed everyone in front of a huge mirror, reflecting their trading self back at them. If you don’t even know the question to ask about trading, much less the answers, get out of the business and spend your life doing something you enjoy.”
How would you have reacted to Seykota’s speech? Walk out or be curious? Think about it.
Feedback in:
I wanted to reach out and thank you for the books you have written. I will admit I’ve read them all from obtaining them through the library system, but I now believe I will buy them as resources to reference. The “Trend Following” philosophy clicked immediately with me and listening to your podcast has really enlightened my mind considering I’ve been typically listening to Motley Fool for my job as a Financial Analyst. In a short period of time I feel I can see through the garbage that is filling those podcasts. I still listen to keep up with my CFO, but feel as if I’m a lone wolf at work with a strategy that none of them could ever understand. Within weeks of reading on Ed Seykota I have already programmed an entire Google Doc to automate my buy/sell/risk/data pull just by typing a ticker for what I want to trade. Kudos to you for following this path and providing the knowledge to us for consumption. I hope to continue to follow your path as you continue. If you are ever in Colorado feel free to check-in with me and see whether I’ve hit life changing levels yet.
Please enjoy my monologue Disruptive Innovator with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
Math in football
Thinking like a contrarian
Risk management
Fundamentals
“I am the type of guy that believes humans make mistakes when they make decisions off of emotion.” – Kevin Kelley
“Doing something different just to be different, that can’t sustain itself. It has to contribute to winning or it falls by the wayside.” – Kevin Kelley
“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.”
“Fundamentalists figure things out and anticipate change. Trend followers join the trend of the moment. Fundamentalists try to solve their feelings. Trend followers join their feelings and observe them evolve and dis-solve.”
“The feelings we accept and enjoy rarely interfere with trading.”
“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible”
“It can be very expensive to try to convince the markets you are right.”
“There are old traders and there are bold traders, but there are very few old, bold traders.”
“I would add that I consider myself and how I do things as a kind of system which, by definition, I always follow.”
“Systems trading is ultimately discretionary. The manager still 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.”
“Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.”
“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.”
“Losing a position is aggravating, whereas losing your nerve is devastating.”
“The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.”
“Luck plays an enormous role in trading success. Some people were lucky enough to be born smart, while others were even smarter and got born lucky.”
“Having a quote machine is like having a slot machine at your desk – you end up feeding it all day long. I get my price data after the close each day.”
“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.”
“If you can’t take a small loss, sooner or later you will take the mother of all losses.”
“It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with skill to help them.”
“Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”
“Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.”
“Be sensitive to subtle differences between ‘intuition’ and ‘into wishing’.”
“The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.”
“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.”
“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.”
“I don’t judge success, I celebrate it. I think success has to do with finding and following one’s calling regardless of financial gain.” (On losing streaks and over-trading) “Acting out this drama could be exciting. However, it also seems terribly expensive. 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.”
“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.”
“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.”
“Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals”. However, if you catch on early, before others believe, you might have valuable “surprise-a-mentals”.”
“If you can’t measure it, you probably can’t manage it… Things you measure tend to improve.”
“The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.”
“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right”
“To avoid whipsaw losses, stop trading”
“Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.”
“Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.”
“Our work is not so much to treat or to cure feelings, as to accept and celebrate them. This is a critical difference.”
“Before I enter a trade, I set stops at a point at which the chart sours.”
“Trading requires skill at reading the markets and at managing your own anxieties.”
“The positive intention of fear is risk control.”
“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.”
The excitement and anxiety generally serve to medicate deeper issues.
Pithy? Yes. Depth behind it? Yes. Follow below.
Avoid the Day Trading Hype
Prior discussion:
“Hello, I am seriously considering purchasing your flagship trading systems course, but I have one very important (to me) question before I do. I gave up work 12 months ago and have spent 8-10 hours per day, mostly 7 days a week, studying trading. I confirmed for myself that trend following was the most profitable, and I also confirmed for myself that all indicators are useless for anything better than 50% accuracy. I have categorically proven to myself that prediction is futile and reacting and following the market is the only real option. So everything you say and seem to teach resonates well with me. I have read your trend following book which I think is the best book I have read on trading specifically. However, I have to disagree with one very important point you voice quite strongly, and before I buy your course I would like you to explain to me the following quote from your website FAQ page: “Day trading is fool’s gold. Our training will be worth millions to you over the course of a lifetime if you simply understand that day trading is a waste of time.” What I don’t understand is that from a technical aspect (if we ignore all fundamentals as you suggest) is that all charts are identical. If I showed you a one minute chart, a 1 hour chart or a 1 week chart, without any prices (simply the individual bars or candle patterns) you would not be able to tell the difference of time scale. A 1 hour chart will have just as many noticeable and strong trends as would a daily chart. If I am trading with a % risk per trade, the pip values are proportional. If I risk 1% on a trade with a 10 pip stop loss and ride a trend for 100 pips profit on a 1 minute chart, the impact on my account equity will be identical as if I risked 1% on a trade with a 100 pip stop loss and ride the trend for 1000 pips profit on a daily chart. The real difference is I will be able to trade far more often on smaller time frames than if waiting for trends on daily or weekly charts. Obviously I understand if someone is trading $ Billions then they simply can’t trade small time frames because of liquidity issues and getting orders filled. But for people starting out with less than $100,000, it makes no sense to sit there waiting for one trade per month, risking only 1% of my account, when I could be trading daily, using the exact same entry and exit rules. Surely technical analysis by its very nature is completely independent of time? You even state yourself in your book that the instrument is irrelevant because the charts and trends are the same for all markets……we just follow the trend regardless of fundamentals or the instrument. So how does time scale make any difference? I will be able to build my account much faster with exactly the same strategy and risk management if I trade intra-day while my capital is small, and then move up and scale in to trades as and when my trade size increases to where liquidity matters for order filling. I hope this question does not come across as argumentative in any way. I just genuinely don’t understand the logic, and I always need to understand something fully before I just follow blindly or take someone else’s word as fact. If you could help me understand why your way of thinking is correct, and where my logic fails, I would be very grateful and will be ready to purchase your trading course this week. My sincere thanks for you taking the time to read this email and hopefully answer.”
Kind regards,
James
Great question! Short answer: transaction costs and slippage are killers. Longer Answer? I am reposting an earlier question and answer session on the same topic:
“Hi Michael, I have been reading and following your website and blog posts for the past several months. I have to say that the information you provide is rare to come across in today’s internet world. The work you’ve done over the past several years has been amazing. I just wanted to introduce myself and ask you a question on which you may be able to shine some light on. Firstly, my name is [blank]. I am currently a student at the University of Toronto in Ontario, Canada. I am in my final year of, what they say, is a prestigious finance program in one of the top universities in the Country (although the quality of information i receive daily is, in my opinion, average at best). I will be graduating in a about 2 months and am one of the few lucky students, in this economy, to have been offered a full-time position post-graduation. In May, i will be starting a job as a junior trader in a prop-trading firm located in [blank]. The firm specializes in futures trading. Although i have been interested in trading and trade on a part-time basis for the past year or so, i am fairly new to the game. The firm is mainly a day-trading firm as many prop-trading firms are. I was wondering how your concept of “Trend-Following” applies to the day trading time frame (that is minutes, hours, etc)? Does this type of strategy only work for longer time frames or has it been successful with traders who use it to day trade? Thank you once again for everything you do. Hope to hear from you soon, [blank]”
It is tough. Many issues from transaction costs to a need for superior access and execution are working against you. Ed Seykota once gave some insights on short-term trend trading:
“Intraday trading is tough since the moves are not as big as for long-term trading and there is no comparable reduction in transaction cost. In general, short-term trading systems succumb to transaction costs and execution friction. You might simulate your system over historical data and notice how sensitive it is to assumptions about where you get your fills…The shorter the term, the smaller the move. So profit potential decreases with trading frequency. Meanwhile, transaction costs stay the same. To compensate for profit roll-off, short-term traders have to be very good guessers. To improve guessing skills, you can practice dealing cards from a standard deck, one at a time. When you become very good at it you might be able to make money with short term trading.”
Seykota was also asked:
“I am new to trend following and wish to ask you what your favorite chart is for determining a given market’s trend? Daily, weekly, yearly, hourly?”
Seykota responded:
“Hmmm…your list seems to lack scaling options for minute, second, and millisecond. If you want to go for the really high-frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light ‘by eye.’ I don’t know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor — something like a daily price chart, going back a year or two.”
I agree with Seykota’s wisdom, but he is not saying short-term is impossible. There are shorter-term systematic traders who have done quite well (Toby Crabel and Jim Simons, for example). They would agree with Seykota that their style is hard. The shorter you go, the more the need for great execution, fantastic data, and multiple systems. And in closing from Jessie Livermore:
“…the big money [is] not in the individual fluctuations but in the main movements — that is, not in reading the tape, but in sizing up the entire market and its trend.”
Big trends? Don’t we all just know those are right around the corner at all times. No prediction of what or when, but they are always coming.
Please enjoy my monologue “Pas de Dough” with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
What trend following and dancing have in common
The philosophical foundations of trend following
Stock trading and location independence
Why relying on “fundamentals” is fool’s gold
What being a silent partner in the trend means
Why Darvas’ thinking from 1959 still applies today
The importance of having no ego when it comes to trading
“The only sound reason for my buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering” —Nicolas Darvas
