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

Frequently Asked Questions

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.

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.

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

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

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.

I Spider While Browsing the Web

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 ? 

Simple Exponential Growth in C++

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. :)

Private Consulting

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.

Cumulonimbus Indicator

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.

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

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.

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

Satire Cover: Living Behind Bars

Real Cover

Business Week, May 3, 1999

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.

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

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.

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

Gold Indian

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?

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

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.

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.

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

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

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.

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?

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

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

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.

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?

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.

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.

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.

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

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.

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?

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.

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.

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,

 Examining Historical Futures Prices.

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.

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.

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.

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

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.

That is the only one? [see below]

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

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.

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!

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 generally allow one deposit, withdrawals upon demand, thereafter.

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 I’m 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.

Personal Involvement

Hello Sir;

I’m 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. I’d like to someday trade my own systems and strategies.

I’ve 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.

I’m contacting you, because ...  I’m wondering if you are involved with any other organization that conducts training on trend following. While I’ve learned much from books, I’ve never attended a course. Mostly because I can’t imagine attending a course from anyone who doesn’t walk the walk. And most seminar trainers don’t 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 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.

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.

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

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