Ever heard of Larry Hite?
Then how about Ed Seykota?
Really, you haven’t heard of him either?
Don’t worry — you’re not alone. These guys aren’t exactly household names. They don’t have public profiles like George Soros, Warren Buffett or Jim Rogers.
But they are two of the best traders on the planet.
Take Ed Seykota for instance…
He doesn’t head a Wall Street dealing room. You also won’t find him trading the markets from the corner office of a sparkling skyscraper.
No. Ed works from his home on the shores of Lake Tahoe in Nevada. His office overlooks a beach and the surrounding wilderness — a far cry from the typical city trader.
People often picture professional traders behind a wall of flashing screens…their eyes constantly scanning an array of changing prices and graphs.
But that’s not the reality for everyone. In fact, the opposite is often true.
Ed’s desk doesn’t have a single quote screen. Not one.
Forget the image of frantic buying and selling. Ed’s trading is mostly done in a few minutes. That’s how long it takes to run the closing prices through his system.
Ed once said:
‘Having a quote screen 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.’
And do you know what?
I’ve seen so many people (including myself) lose money by over-trading. Watching a quote screen is like being in a casino with a handful of chips. The urge to play can be irresistible.
In a moment, I’m going to tell you how some of the best traders operate. The simplicity of their strategies is often surprising. You’ll quickly be able to use some of them yourself.
But first, let me tell you about Ed Seykota’s impact on my career…
Lessons from a wizard
Ed is a pioneer of algorithmic system trading. Along with Larry Hite, he was one of the first people to use computers to test and manage trading strategies.
I first read about Ed (and also Larry) in Jack Schwager’s Market Wizards. It was 1993, and I was a junior currency trader at Bankers Trust.
Starting out as a trader at a bank is tough. You must prove your worth quickly…and the clock is ticking from the moment you sit down. I recall some trading careers ending within days.
My main focus back then was on a trade’s upside potential. I thought a few big bets were the best way to keep my job. It was a miracle I survived my first year.
Fortunately, I had cause to re-think my approach…
I’ll always remember reading one of Ed’s comments. He said:
‘There are old traders and there are bold traders, but there are very few old, bold traders’.
And it was true…
The most aggressive traders in the dealing room were young men. Ed was talking about people like me. I was every bit the bold trader…I was an accident waiting to happen.
That one sentence was a career changer. I began to realise that it wasn’t just about how much a trade could make, it was also about how much I could lose and continue trading.
It was a lightbulb moment.
I began looking for trade set-ups where the potential gain would justify the risk. It was stupid to swing for the fences if my career might be bowled at the stumps.
I also cut back my trade size. It became clear that many relatively small trades were better than a few big ones. My risk was now small and consistent.
This had a dual effect:
- The risk of a single career ending trade was now minimal; and
- By casting a wider net, I had better odds of getting the biggest trends — it often only takes one super trend to make a trader’s year.
I was now in with a chance. There was still a lot of work to do. But I was at least starting to think like a successful trader — not a mug punter. My career was no longer on a knife’s edge.
People often believe successful trading is all about secrets. They think that the best traders have some special knowledge that regular people can’t access.
I’ve seen many traders get lost in a maze of indicators and theories. They jump from one method to the next in search of the Holy Grail.
But do you know what?
There is no Holy Grail or ‘secret’.
The strategies the best traders use are nothing new. They’re mostly variations of the same winning tactics that have been in use for decades, if not centuries.
Many beginner traders make the mistake of focusing on one thing: when to buy.
Yes, entries are important.
But they’re just one cog in the machine.
The difference between success and failure are the rest of the cogs. Sadly, many people lose their trading capital before figuring this out.
So how do some of the best traders make millions?
Well, it essentially comes down to five rules:
- Trade with the trend
- Have many relatively small trades
- Cut losses early
- Give winners room to run
- Be slow to take profits
I’m going to go through each of these in detail over the next five weeks. You’ll also see real examples from my own portfolio. You’ll learn how to apply these key elements to your own trading.
Successful trading isn’t about secrets. It’s about steps.
Get the process right, and the money should follow.
Until next week,
Editor, Quant Trader
Editor’s note: Quant Trader uses the five rules you saw earlier: It buys into strength, spreads risk across many stocks, gives winners room to run, cuts losses, and is slow to cash in a profit.
That’s how it’s been able to identify trades like: The A2 Milk Company Ltd [ASX:A2M] +320%, Vita Group Ltd [ASX:VTG] +199%, HUB24 Ltd [ASX:HUB] +147%, and Blackmores Ltd [ASX:BKL] +353%.
Some of the best traders make millions with this sort of approach. Check it out for yourself. It could change the way you trade forever.
All graphics produced by Quant Trader unless otherwise noted.