(c) Ed Seykota, 2003 ... You may not reprint without permission.

Ed Seykota's

Frequently Asked Questions

FAQ Home and Ground Rules

 

February 2003

Questions Replies
Thu, 27 Feb 2003

Tribe Member Report on Meeting

I value the work we did tonight very much.

Obviously there'll be lots of reflection on my end over the next few days.

I appreciate the forum & hospitality.

The Incline Village Trading Tribe now includes a couple of commuters from Los Angeles.
Thu, 27 Feb 2003

Losing


I find that many individuals hold back questions, ideas and actions for fear of losing face or appearing foolish. I wonder if this can create a road block in the path to success. It seems that most of the ideas of successful people, originally appeared foolish.

If fear of losing (face) gets into your trading, you might have trouble cutting losses.

Some people seem loss-proof. No matter how hard they try,  or how foolish they might they might feel, they just can't seem to lose.

Others celebrate their losses, even proudly post evidence of their losses on the net.

Traders who can celebrate both winning and losing, as just natural parts of the process, like breathing in and breathing out, can also buy and sell the same way.

 

Losing is not always so easy and is sometimes grounds for celebration.

Wed, 26 Feb 2003

Losing Streak


Last year was my first year as a professional trader. I trade the foreign exchange currencies market (spot). I had a good return. I started this year, though, in a very disturbing losing streak and that affected my trading. Because of money management - I'm very rigid about 2% stops - I was not that hurt in my account, but that is not the problem. What disturbs the most is the idea of losing so many times in sequence. Sometimes I left the market for 2 days, but when I came back, I started to lose again because of anxiety. Now, I have established that I would only trade again when my anxiety was over. I did that and my first trade was a winner just like last year's good, prudent and conscious trades. Do you recommend any attitude at this point - when I'm starting to feel like me again in the market?

 

 

 

This question goes to the very heart of trading ... how to trade so as to keep mind and spirit clear, and how to manage hope, fear, greed and despair where these infectious emotions are also essential market forces.

Some traders try to ignore and/or suppress their feelings; this seems to work for a while and then lead to the big blowout. Some just trade small enough so that losing does not make a difference ... and then neither does winning. 

I think the best way is along the lines you suggest, to honor your feelings, and to include them, consciously, in your system design. 

A group, like the Trading Tribe, in which traders develop camaraderie, and come to see how others deal with these issues, can also help.

Wed, 26 Feb 2003

Emailing other Participants

Would you mind if I emailed another FAQ contributor and introduced myself? I'm speaking in Toronto in March and since I'll be there I'd like to meet him.

Connecting traders on the Web, so they can help one-another, is one of the goals of FAQ. 

I Spider While Browsing the Web

Tue, 25 Feb 2003

Programming

Hi have read that you started out programming your own systems and still continue to do so.
 
Wanted to know if you have any experience with of the shelf products like [name of a product]. If you believe that doing it yourself from scratch is best, what language, would you recommend and why ? 

I started out with Fortran 4, and punch cards. Lately, I use C++ and Java.

I like to code from scratch, so I  can implement any design.

Many shelf products handle most of the basic algorithms, and can get you up and running right away.

You might like to run a couple simulations by hand, just to make sure the program is doing what you think it is doing

f_Equity *=;

Simple Exponential Growth in C++

Tue, 25 Feb 2003

Private Coaching

I'm still here, you haven't lost me ;) I have been soul searching and thinking how to approach my essay. If I may could I ask you a question? Are you looking for a masterful piece of literary work or for the sake of limited space would it be more appropriate and efficient to tell you what areas I would like to cover (not excluding of course your typical coaching progression) in more of a bulleted format? I'm just not sure how much detail I can get into a flowing page. I would need 5 pages just for an essay on volatility.

Also, would you discourage me from participating in your Q&A given that I might be personally coached by you in the near future? Although I must say that I find most of the questions and some of the responses on FAQ, frankly to be quite vague/meta-physical. But the clip-art is great! :)

Concerning my communications to you. You had previously stated that all submissions to you would become your intellectual property and to be used at will and at your digression. This I believe might limit my openness and details regarding my background and personal adversity that I believe would give you a true minds eye at what makes me tick and my overall evolution. If there are some possible checks and balances you could inject in this matter please let me know.

Please place me in the "queue" for your future book and please by all means place me in the queue for signed copies if there is one.

I hope this email finds you well and in good spirits. And by the way I could use some work on the rest of my head also. :)

FAQ (this page) is for you to participate in a dialog, and possibly receive feedback from readers.

Some of the FAQ material will likely wind up in a book.

Private consulting is for those who (1) wish to remain completely anonymous and (2) wish to explore their personal styles in depth, like how to be more comfortable with ambiguity.

Private Consulting

Tue, 25 Feb 2003

Secondary Indicators

Have you ever investigated the merits of using NASDAQ volume / NYSE volume as a secondary indicator, to signal a lack of speculation, similar to your magazine cover indicator?

I have observed correlations between market volatility and the beginning and ending of trends. As an example, exiting a trend when the volatility doubles or triples from the point of entry (sometimes measured in ATR's or similar type indicators). The theory is that as trends persist and accelerate, they eventually reach a point of wild and rampant speculation, indicating a general market correction is near.

I have recently been studying NASDAQ volume as a percent of NYSE volume:

(1) On December 29, 2000, the this ratio of NASDAQ volume as a percent of NYSE volume was at 244%, a 5 year high.

(2) On July 31, 2002, the ratio was at 79%, a 5 year low.

Both points above indicated two extreme degrees of speculation, and occurred relatively close to changes in trend. I am not sure if this indicator can be used for trading but it is definitely an interesting observation.

Magazine cover analysis is no sure-fire system. The best indicator I know is Trend. The other good ones are Trend and Trend.

Given the benefit of hindsight, you can get almost any indicator to work remarkably well.

The Cloud Indicator: lie on your back under some nice clouds ... with a little practice, you can see whatever you are looking for.

Cumulonimbus Indicator

Sat, 22 Feb 2003

Interest Rates

Here's a picture of me working on the economy with my friends over at the fed.

No comment.
Fri, 21 Feb 2003

Magazine Cover Warnings

I think this should be affixed at the top of magazine covers that possibly carry an indicator message. It would be like the warnings on cigarette packages -- but I guess it would have the same efficacy. Do you agree?

"When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once." -- The Crowd - Gustave Le Bon.

The Crowd, 1895, still applies today.

A magazine cover to mark the beginning of a decade of whipsaw-free trading.

Fri, 21 Feb 2003

Disciples and Trading Tribes

I trust all is well and your eye is continuing to recuperate.

I am finding the FAQ to be very useful and entertaining.

The quote from de Mello via Tony Conflitti about being your disciple really meant something to me when I read it. When
I first met you about a year ago, I began to learn that many of my questions are best answered by me. Also, I've spent enough time with you that I'll often hear your response to the question in my head. Your response is usually a positive feeling variation of: "Why ask me? You know the answer". I
still have much to learn and I look forward to continuing our relationship, however, when I have a question, I know whom to ask first.

With regards to the Trading Tribe meetings. If I were to be invited and I lived within 1000km of your place or if the meetings were less frequent than weekly, I would be able to
commit to regular attendance. It would be unfair to the others in the group for me to be a part-time participant. Therefore, I intend to help establish a group  in the Toronto area who combine desire for excellence with the desire to support and receive support from other traders. Perhaps the information, questions and results from these meetings will provide some helpful material for the FAQ. If you have any thoughts, comments or objections, please let me know.

All the best and thanks for pointing me towards the window.

The doctor says my eye is getting well enough so that he can proceed with replacing the rest of my head.

The value in FAQ comes from individuals who are courageous and outspoken and volunteer their questions and their own situations as material.

I am experimenting with weekly and bi-weekly formats for Trading Tribe Meetings. One member commutes to Lake Tahoe from LA. The rest are local.

Occasionally I host a weekend meeting, in response to demand that seems to appear from time to time, from all over the world.

Good luck to you with your Toronto group.  Perhaps we can share some ideas about how to support having productive meetings.

Fri, 21 Feb 2003

Magazine Covers

The indicator has failed miserably here even though this is an emotionally evocative cover.

Satire Cover: Living Behind Bars

Magazine Covers often indicate completion of discount.

MSO came out at about 50 late in 2000, fell to about 5 late in 2002 and currently trades at about 8.

Although the satirical cover you cite is not from a mass-market magazine, the image enjoys circulation on Internet, so it still might indicate the discount in MSO nearing completion.

I wonder who published this cover and when it first appeared.

In any event, thanks for sending in an interesting variation on the theme.

Real Cover

Thu, 20 Feb 2003

 
Magazine Cover Analysis


Watching Magazine covers is similar to watching a stochastic indicator. It's very easy to point out the times when it works but people usually never take notice of how often it doesn't (which is plenty). Attached is the Business Week cover from May 3, 1999. The cover asks, in big bold font, "A Wiser Bull?" The second half of 1999 proved to be one of the best bull markets in history. I believe the S&P 500 was up roughly 5.4% in June 1999 and closed the year with a 20% gain, way above the historical averages.

Magazine covers often show up at opportune times probably just as often as they show up at inopportune times.  Probably better left out of the world of trading. But they are entertaining.

Business Week, May 3, 1999

About the only sure thing is that there aren't any sure things. 

The Magazine Cover Indicator seems to work better, with very emotionally evocative covers.

The May 3, 1999 cover bull seems dark and somber and relatively devoid of emotion. No fire is coming out of the nostrils. The bull below is radiant and seems a little stronger, yet still not much evidence of frothy ebullience.

I recall a more emotional cover in which an investor was riding a wild bull and money was flying out of his bulging pockets.

At the the all-time top of the gold market, several magazines had stacks of gold on their covers.

At the previous top of the oil market, several magazines had oil covers and Fortune Magazine had the word, OIL, on the cover in 7" font.

Thu, 20 Feb 2003

Synchronicity


How ironic that these quotes appear at just the most opportune times. Found this one last night.

"A Trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public as well as the limitations of his brokers, must also know himself and provide against his own weaknesses." -- Reminiscences of a Stock Operator

About 100% of the game is psychological, about 100% is mathematical and about 100% is other stuff. 

Magazine covers often show up at opportune times to indicate the end of a smooth move, the beginning of volatility.

Fortune, December 30, 2002 (issues a week earlier) Asks, in 3/4" font, "Can this bull run again?" DJIA then at about 8500. Today DJIA about 7900.

Current Business Week, February 24, 2003 edition (issues a week earlier) has the word, OIL, in 2-1/4" font. April Crude recently at about 35-1/2; April Unleaded Gasoline at about 107; April Heating Oil at about 97-1/2.

Thu, 20 Feb 2003

In the Zone / Price of a Dollar

I have defined what I do as trend-trading and, more importantly, I have defined who and what I am.

In learning about trading I think the most important thing I learned was not the "math", but the mechanical, systematic, disciplined and unemotional manner. It has truly helped me with my psychology, my trading make-up and has implanted the acceptance of the market as an entity totally separate from me. One in which I can only react to while being, simultaneously, intelligent and impassible.

"I was acquiring the confidence that comes to a man from a professionally dispassionate attitude toward his own method of providing bread and butter for himself." -- Reminiscences


Sounds like you are at a nice place from which to trade ... getting there is one thing, and staying there is another.

I notice the prices of other things, like the Dollar, fluctuate in relation to gold.  In 1910, the Dollar is worth 1/10 of a Gold Indian, in 1989 1/2000 and in 2003 the Dollar is worth about 1/500 of a Gold Indian. The price trend of the Dollar is either up or down, depending on how you define trend.

Gold Indian

Wed, 19 Feb 2003

Principles of Trading II

The fact that you highlighted Old Turkey's quote is quite impressive. Looking within, I have failed to master the skill of Riding Winners. While examining why, one of your earlier responses comes to mind. You said:


Using your head is a good way to make a little money. To make a lot of money, use the other end. Learn to sit tight and handle your feelings during normal reactions. Your zone of opportunity might be just above your chair.

I can blame this partially on my system but looking at the bigger picture, the system is just a derivative of the person. I know that the problem is not in my "wants" as a trader because it definitely angers me to exit a trade and watch it continue in my anticipated direction. I do want to be highly profitable and achieve monetary success. What causes me to be apprehensive in these situations? Does a feeling of courage in these types of situations come with experience or is it a mindset which can be trained/learned, or for that matter taught?

If a system is a derivative of a person, then the difference between discretionary traders and system traders fades. A discretionary trader has a consistent emotional system, and a system trader must still make some gut decisions, such as portfolio selection, as trading instruments and/or client funds appear and disappear.

While you are waiting around for courage, you might consider using anger, since that seems arrive at just about the right time.

Wed, 19 Feb 2003

Know Yourself


In Reminiscences, amongst the galaxy of one-liners and even paragraphs that are crucial to understand, then retain and apply! My favorite one, the one that I have inviolable space in my head for is "a stock operator has to fight a lot of expensive enemies within himself" These are the most heartfelt and sagacious for me.

Taking the above statements into consideration, attitudinally I will always be in the "classroom" when it comes to trading/markets. Why? Simply because I am still learning to unlearn the injurious and expensive natural endowments that I have in my blueprint. In addition, I am also still learning how to consistently display, to myself, my recently acquired education and trading nature. What a process. Forever dynamic, I guess. Incontestably, not a destination but journey.

Shouldn't most traders work more on themselves rather than on methods, systems, finding the holy grail? That is, ostensibly, the first ingredient and the most important asset one should possess before attempting to become successful with the usage of tools and implementation of modus operandi.

PS: Your price of coaching @ 15 ounces of gold, is coming down.

Thank you for exemplifying the path of growth.

Changing deep patterns can be difficult. Not changing them can be even more difficult.

Your claim that gold is coming down says something about the way you define trend.

During the 1849 Gold Rush, a glass of water sells for $100.00 while a pound of bacon sells for a penny. Astute traders profit.

Wed, 19 Feb 2003

Principles of Trading


Most of my trend following knowledge has come from trading literature and courses. I wonder if you could share some of your knowledge because I am sure your database of knowledge from 35+ years of "Very Successful" trading and teaching experience is extraordinary.

I believe that building from established and proven principles can create an excellent foundation and accelerate the learning process.

1. Trade with the trend.

2. Ride winners and cut losers.

3. Manage risk.

4. Keep mind and spirit clear.

You might like what Old Turkey has to say in Reminiscences of a Stock Operator.

Wed, 19 Feb 2003

Drawdowns

Looking forward to reading your upcoming book. I believe I read in the market wizard book that you averaged roughly 60 percent return annually in your trading. I wanted to know approx. what kind of historic drawdowns you experienced, average and max. If this is confidential I completely understand.

Amos Hostetter told me he measured his drawdowns in numbers of stomachs. I refined his idea and measure my own draw-downs in millimeters of stomach lining. Drawdowns matter if they make you jump off your system. The intensity of drawdowns also has to do with your philosophy.
Wed, 19 Feb 2003

Boston, Redux


Can you tell me exactly what measurements would be required in an independently audited report of a trading system? You've mentioned Sharpe, drawdown and return. Would I need Monte Carlo? Could I produce these reports myself or would it have to be from an independent, to raise money for a Hedge Fund?

I wonder how you made the trip to Boston so quickly, with all the enhanced security and inclement weather at Logan Airport.

You might consult a library, trading websites or professional consultants for answers about system design, metrics and marketing.

Wed, 19 Feb, 2003

Boston

If all goes well I will be flying to Boston to help in the system coding required to produce an independently audited report.

Professional systems designers can provide (1) a wealth of information about system design and metrics, (2) advice about how to present your marketing materials and (3) third-party credibility.

Durgin Park

Tue, 18 Feb 2003

Philosophy

Yes, I completely agree with your insight on the inter-relatedness of things. I think Fritjof Capra also said something which goes like, "What one does to the web of life does it unto himself". This is similar in spirit to one of the answers propounded to the popular question, "What is the meaning of life?": The meaning of life comes from the meaning we give to it.

Philosophies based on going with the flow, taking responsibility and realizing things are about as important as you make them ... seem well suited for trend following. Serving others seems to help with staying in balance.
Mon, 17 Feb 2003

DG Watts

Regarding the literature recommended, I have read Reminiscences of a Stock Operator 2 times (I think this book must be read many times during a speculator's life) and Mr. Livermore talks about a great book: Speculation as a Fine Art by Dickson G. Watts. I bought it and figured out that it is not a book; it is knowledge at its purest form; knowledge in simplicity. Every time I enter a trade in the currencies market I remember something written in that book. What are your thoughts about it? Do you recommend it to your students?

I like it.

Sun, 16 Feb 2003


Being right /  feeling comfortable


In the past, I have found myself jumping from one trading system to another seeking the "perfect method." Probably because it is uncomfortable to lose money and I was looking for a method that was 100% accurate. Finally realizing that no trading method is 100% accurate I have started to explore myself instead of my method.

One of the problems I have encountered is ... Why do I continuously make choices that make me feel comfortable as opposed to making choices that are right. Attached is a 3 month chart of RGLD. I will give you a play-by-play of a recent trade along with my thoughts and feelings at the time.

1) I entered the trade long on Dec 9, 2002 at $21.30. My reason for taking the trade was because gold was in a recent up-trend and the stock broke to a new high. I felt very comfortable entering the trade at this point because the stock was trending upward on increasing volume. I set an initial stop loss and began to watch the trade progress in my favor.

2) Over the next few weeks I watched this trade further progress in my favor continuously contemplating adding to my original position. I was hesitant because I thought I was in at a great point and didn't want to bring my average cost higher. I was torn between making my position larger, potentially increasing my chance at a much larger profit, and not doing anything and remaining very comfortable. I chose comfort.

3) Watching the trade continuing to progress higher I was beginning to feel upset about not adding more shares to my position and forgoing a larger profit. Instead of being satisfied as the price went up I was getting more and more angry for letting myself miss a huge opportunity. I was considering just getting out of the position at $26 because I had made a mistake. I didn't get out because in the back of my head I knew that the trend was strong and I was in the position at a great entry price.

4) On January 6, 2003 I finally added to my position at $27.15. I was tired of seeing the stock continue to rise and not take full advantage of the situation. When I added to the position I moved my stop to $23.35 and was now content that I had increased my position size. I knew that I should of added to the position earlier but I didn't want to continue missing a great opportunity. Over the next few days the stock reversed course and begun declining in price. I wasn't concerned because I felt a reaction was warranted after such a large move and I knew my trailing stop would protect me.

5) On January 15, 2003 I was stopped out of the position at $23.30. I was a little bothered because I was stopped out near the opening of trading and the stock reversed course and closed near the highs of the day. After analyzing the situation, I realized that I had done right by maintaining discipline and adhering to my stop. I knew I had wasted a great opportunity by allowing myself to chase the stock at $27.15 but that decision made me comfortable at that time. I had sacrificed being right for being comfortable.

6) Watching the stock move as high as $28.80 by early February was disappointing because I knew my initial entry point and analysis were very sound. I was more upset with the fact that I had traded the trend wrong and didn't care so much about the loss of potential profit.

Looking back on the trade today I can spot a flaw in my method. I didn't use a set rule for adding to my position. Instead, I just figured that I would add when the time looked right. It was difficult to add early in the trend because I felt uncomfortable increasing my average cost, possibly because of a lack on confidence. My natural human traits lead me to make decisions that were wrong in order to feel comfortable. What did I learn from this ... It is better to be right than comfortable.

I support your looking for the answers in the right place: namely, within yourself.

I wonder what accounts for your discomfort at the low 20's -- transforming into comfort at the high 20's. 

Other feelings that populate the investor cycle are hope, fear, greed and despair.

Another way to frame pyramiding is to pre-figure your total position, and then to pyramid up to it, rather than pyramid on top of it.

Trading profitably beats both being right and feeling comfortable.

The Moron Rule: just keep adding more-on.

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

 

 

Sun, 16 Feb 2003

Billion Percent Management


There is this figure in Wall Street, an old-timer investor called Carl Icahn. Well, i've seen a declaration from him which I thought very curious ... he states that "Charts predicted 18 of the last 5 economic crises". I wonder how he's being that honest with his public ... or ... Considering the fact that this guy started trading after graduating college (Major in Philosophy), with approximately U$ 5,000 back in 1968, and his equity is now estimated $5 billion ... The question is: Does his impressive track record have to do with "billion percent management?" How would you explain this kind of record? How do you personally feel about his statement described above?

Trying to keep the discussion within overall trading philosophy, I, again, thank you for your considerations.

Rather than invite third-party gossip (from me), I suggest you go directly to the best source (him) and ask your question.

Meanwhile, The National Enquirer, The Drudge Report and other fine purveyors of news might assist you.

Available at fine news-stands

Sun, 16 Feb 2003

Experts


It always enchants me when two financial professionals (money managers, chief investment officers, strategists, etc.,) appear on a financial markets program and are totally discordant as to the where the economy and/or the stock market is headed ... and with emotion. Divergence sans pareil. Always reminds me, to an extent, of the paradigm example in Covey's Seven Habits....one individual sees a young woman, the other sees an old one.


Two different answers emanating from two different perceptions. BOTH correct. Conversely, both of the finance pros cannot be right. Their encounters on these programs are not joviality. Most of these intelligent and experienced people have clients invested, manage funds, accounts or portfolios, etc., which back up their bull/bear deportment. In other words, there is money ... and reputations, jobs or careers ... "where the mouth is". Truly a zero-sum game.

These "experts" have the same economic facts and are cognizant of the political sphere, both domestically and globally. They know the trends, have all the fundamentals they need ... likewise with the technicals. Comparably, societal conditions at home and abroad are monitored.

I guess Twain was absolutely right when he said, "it were not best that we should all think alike; it is difference of opinion that make horse races." Nonetheless, I am inclined to believe that, after their debates and as markets and the economy evolve, one of these learned and polished individuals usually does not have "the winning horse."

If economics is the dismal science, what should be ascribed to, or afforded, our financial markets professionals since the vast majority of them are not economists and do not serve in that capacity?

p.s. I appreciate your website and I thank you for it.

The difference of opinion among economists often focuses on predictions about the future.

Since the future doesn't exist, there's no accountability.  It's like wrestling -- entertaining combat between your favorite gladiators.

Note: the data economists can actually obtain with complete accuracy, they hardly ever analyze in public: namely, their own track records.

 

Irrational Exuberance Speech, December 5, 1996, DJIA about 6,300. Thereafter, DJIA continues up to around 11,000.

Sun, 16 Feb 2003

Influences


Thank you for your quick reply. Just out of curiosity, I noticed that some of things you say are very similar to those of Eastern philosophers, such as "It's the trading that does them", which is also similarly mentioned in the Chapter "Zen and the Art of Trading" (?) of the New Market Wizards. Therefore, I'm wondering if part of your own (trading) philosophy have been influenced by any them or you just happened to reach similar conclusions through your own reflections?

On a different note, I would like to ask if your views on whether options (LEAPS) are effectively tools for trending following strategies or is one better off sticking with trading the underlying or futures. Thanks.

Everything influences everything and life evolves. Your choice is the degree to which you participate.

3/4" drills, violins and lawn chairs all can be effective tools. It takes skill and experience to learn which ones to sit on.

 

Sat, 15 Feb 2003

Tribe Meetings and Assemblies

Do most participants live in the Tahoe area? It would seem difficult to assemble people from all over the world on a consistent basis.

Would you ever consider conducting a Tribe meeting using an electronic forum, such as a private (invitation only) chat room setting?

I don't assemble people, they mostly arrive, pre-assembled. FAQ is an electronic forum.

 

Sat, 15 Feb 2003

Where's the book ... changing views

Dear Mr. Seykota,

I am having difficulty in finding your book "The Trader's Window" in the bookstores and even on the Internet. I am, therefore, hoping that you can help me with this issue. Moreover, if it is not too much to ask, I was wondering whether your current views on trend-following systems have changed since the publication of Market Wizards. If so, could you please describe how they have changed?

Thank you very much for your time and trouble, and thank you also for being such an inspiration to aspiring traders such as myself.

The book is in process.

My views on trend following stay about the same. I notice I am changing, with the trend of aging. So far, I'm sticking with it.

15 Feb 2003

Thanks

Thanks again for your insight on Apostasy, been thinking about your hunch the last few days, has really helped me to understand the importance of focus and patience. Also, great quote by Napoleon Hill... I finally put my plan into writing. Much Appreciated,

You are welcome.  Thank you for participating on FAQ. Many people read these dialogs and can identify with you and gain insight into their own situations.

February 11, 2003

Get Tomorrow's Prices Today

I personally haven't experienced it but I have heard stories of people accessing the future and the past with the following device ...

Perhaps you can arrive for a Trading Tribe Meeting in the DeLorean.  One of the other members says he left his car somewhere, sometime, and wants to ask you about it.

 Examining Historical Futures Prices.

February 11, 2003

Jesse Livermore

Dear Mr. Edward Seykota,

Have you ever asked yourself why Jesse Livermore shot himself in that hotel in New York? Do you think his hazardous personality finally collapsed at his sixties? Please, can comment on this? Thank you very much.

Likely, Livermore shot himself in the hat and coat room of the Sherry Netherlands Hotel in NYC, in 1940. He had syphilis. His bold manner seems consistent with his volatile track record. I visited the Hotel a few years ago. There is no plaque to mark the event, and the room no longer exists.

Sherry Netherlands from across 5-th Ave.

February 11, 2003

Short-Term Trading & Current Positions


The concept of trend is intrinsic with the old saying: "The big money is on the big moves". Well, I trade currencies using the inter-bank market, and in this market, let's consider a one-week movement, it always give us opportunities to day-trade or operate within a 4-day period. In the stock market I am usually more patient. I'd like to know your feelings concerning short term trading.

I know this is very personal, but I'd like to ask it anyway. What markets do you currently trade? I don't think you'll answer this one, but please don't blame me for asking.

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.

Risk management is trader-specific, so a trade suitable for one trader might not be suitable for another.  I prefer directing FAQ to trading philosophy.

February 11, 2003

How to Join the Tribe - In the Now

Also, I was wondering if I could possibly join one of your Tribe meetings in the future?

I do not know how to conduct meetings or trading in the future, or in the past.  I do not even know how to access these places and I have no evidence they even exist. I mostly operate in the continuing moment of now.
February 11, 2003

Hunch

You hunch is dead on [see below]. Recently I have come to realize this and have begun to address the issue. Patience ... the ability to tolerate delay, is a big part of my problem ... I tend to look for certainties which is one quality the market refuses to offer. Having self-confidence without certainty is a much larger part of the problem.

Looking within, as you are doing seems a more direct path to success than only looking outside, to the markets.
February 11, 2003

Is that all there is ...

That is the only one? [see below]

Yes, read it so many times you lose track of how many, underline your favorite passages until you tear holes in the pages and be able to quote Old Turkey by heart.

Hunch: in your trading, you tend to skip around, looking for a new idea, rather than sit with a major mover.

February 11, 2003

Books

Can you please give us a list of valuable trading books and literature which you have read and would recommend.

Reminiscences of a Stock Operator, by Edwin LeFevre.

Reminiscences of a Stock Operator, by Edwin LeFevre.

Reminiscences of a Stock Operator, by Edwin LeFevre.

February 10, 2003

Where's the book

Hello Mr. Seykota,

I have read your interview in Market Wizards over and over (probably 10 or 12 times) since 1990. It has always fascinated me that a MIT engineer found such a completely psychological approach to the markets and to his life. The notion that "everyone gets what they want from the markets" seemed to echo through Mr. Schwager's and my head.

You were such a mentor to all the traders around you in the '70's, it's just too bad I was only in the single digit ages back then! I would love to have been a jade apprentice! I have only one question Mr. Seykota, when is your book The Trader's Window coming out? I am looking forward to the enlightenment that such a book would provide.

Thank you for being there, I like your website!

Still in process. See Books, on this site. This FAQ site is providing me some practice and direction for topics to appear in the book.
February 8, 2003

Funds to invest

I am interested in giving you funds to invest for me. Are you accepting new clients? If so, what are your requirements? For example, what do you charge? How frequently do you report results? What restrictions, if any, do you have on when a client can add or withdraw funds from the investment account? What special requirements, if any, do you have in order to accept
a client?

P.S. If you are giving investing classes or speaking at an investing
seminar, I will be interested in attending.

I hold that the right match between client and manager is essential for success.  Some clients seem more gifted than others.

I like to know a client well before accepting funds, particularly how he handles risk is various areas of his life.

I generally allow one deposit, withdrawals upon demand, thereafter.

February 7, 2003,

Trading Tribe

I have always been a great fan of yours since reading you interview in Market Wizards. You have been a sort of silent mentor to me without the benefit of correspondence. Since Iím sure you have heard that before in abundance, I will leave it at that.

Instead of going on about my story and situation assuming of course you would be curious and interested in it, I will instead keep this short ... I wanted to ask you however if the Trading Tribe still exists and accepting new members or if you were mentoring any traders. Thank you for your time and inspiration over all these years.

I hope this finds you healthy and in good spirits.

Thank you for the acknowledgment. I am pleased to have been able to pass some notions along to other traders. The Trading Tribe meets in Incline Village. See Index.
February 7, 2003

Personal Involvement

Hello Sir;

Iím a great fan of your work. I work for a large software company, but my passion in trading. I trade in a long term trend following style, using a robo broker. Although, my trading has gone well, (using a vendor long term system), I am committed to continuous learning and want to become better. Iíd like to someday trade my own systems and strategies.

Iíve read everything I can get my hands on and practice creating systems in a program called Trading Recipes, which lets me focus on position sizing, money management and other risk averting strategies.

Iím contacting you, because ...  Iím wondering if you are involved with any other organization that conducts training on trend following. While Iíve learned much from books, Iíve never attended a course. Mostly because I canít imagine attending a course from anyone who doesnít walk the walk. And most seminar trainers donít trade for real. Rarely do you find someone such as yourself with a documented track record, who also teaches.

Please let me know if you are personally involved in any training courses/seminars and how I would go about applying.

I involve myself personally in any seminar I either attend or conduct. See Meetings on this web-site.
February 6, 2003

Poker

I would like to thank you for allowing the publicity of your work entitled "Determining Optimal Risk." I am 27, and when I started trading, at 21, after some profits, I ended up wiped out due to drawdowns in the options markets. Even though I had previously studied good literature relating to Technical Analysis (Edward and Magee's and John Murphy) as well as Reminiscences of a Stock Operator. I have discovered that my problem was a good risk management system, which can allow me to set the heat more appropriate with my personality.

I am a self-taught trader who loves to win in the markets. Now, I feel I am doing fine and i attribute this to the fact that i have carefully studied your work. That's the reason I am so grateful to you. Also, since I've been applying your model to my poker game strategy, I haven't been wiped out in poker for  a year and a half, this fact I also attribute to "Determining Optimal Risk" approach to risk management.

Consider the wild card poker paradox. With wild cards, some hands can be either of two types (two pair or three of a kind). The more desirable will, then, more often arise in play, contrary to the basis for it's ranking. 

In practice, poker has to do with assessment of pot odds, reading tells and waiting for a good game to develop, similar  practices to ones useful in trading.

Feb 5, 2003

How to Define Trend

Dear Mr. Seykota, I was very pleased to find that you have a site where you are prepared to answer questions from readers. As such I would gratefully appreciate any comments you might have on the following:

For systematic trend following strategies to work, there must exist discrepancies between the behaviour of prices and behaviour predicted by a random motion model. (1) If the markets were purely random then I would have nothing to gain (a zero long term expectancy) by adopting any form of strategy other than "flat betting". Adopting a trend following strategy, whereby I "receive" infrequent large payouts based on favorable large moves and I "pay" frequent small payouts based on small adverse moves would not provide any benefit in a random world. The few large winners would in the long run be cancelled out by the numerous small losses. For trend following to work there must be (2) "too many" large "runs" versus "too few" short "runs". The opposite holds true for counter trend trading.

In your capacity as a noted and successful trader/trend follower, I am (3) very curious if you have a definition of what a "trend" is.

Additionally, I would appreciate any thoughts on what one could consider to be a (4) "1 unit run" in terms of the financial markets.

1. Consider counter-examples to your premise: (a) Molecules in your car engine cylinder, at the apogee of the piston stroke, move randomly, and also provide lots of energy to the drive train; (b) Markets can pass tests for randomness and also provide profits for good traders; (c) Black-Scholes model does not account for trend.

When looking through historical data for "optimal" trading methods, remember to look also within yourself. One good trend, stuck with, is worth more than a thousand optimal signals, missed.

2. Distributions showing fat tails seem consistent with markets having emotional entrainments as well as a logical balances.

3. A trend is a general direction. To generalize, use smoothing, such as: moving average; trend line; support & resistance. Your definition of trend is the smoothing method you use.

4. Your method would determine your 1-unit run. A 10-year system would have larger unit moves than a 10-minute system.