Ed Seykota is a legendary trader who turned a $5000 into $15,000,000 over a 12-year period.
In the book Trading Lessons From A Market Wizard, Seykota shares his insights into how he was able to do it. He also teaches readers how they can apply these same principles to trading in their own lives.
Rule #1: Trade in the direction of the trend.
The first rule of trading is to trade in the direction of the trend. In other words, if you are unsure of what is happening with a particular stock, wait for confirmation before making any trades. If it's up, go long; if it's down, short!
If you don't know if a stock is trending up or down (or sideways), wait for confirmation by watching price action and volume levels as they move over time.
Once you have determined that there is indeed a trend change occurring in your instrument(s) of choice, then you can start taking positions in accordance with said trend change; i.e., buy when an upward move has been confirmed and sell when downward movement has been confirmed.*
Rule #2: Cut losses short.
Cut losses short. Cutting losses is one of the most important and difficult things you can do in trading. When your trade moves against you, it’s very easy to get emotional and keep chasing your losing trade by adding more money to it. This can turn a small loss into a big loss or even worse, turn an inconsequential loss into a devastating one!
The first step in cutting your losses short is knowing when they are too long already so that when things start going wrong (and they will!), you know exactly what needs to be done: close out positions quickly before they get any worse.
Cutting losses requires mental discipline and mental toughness; it requires controlling your emotions as well as controlling your stops so that every time there is an opportunity for profit, you know how much risk there is involved with taking that trade and whether or not those risks are worth taking based on current market conditions at the time of entry. It also takes self-awareness because if you don't know how well-equipped emotionally—and psychologically—you are for dealing with this type of situation then how can anyone else?
- Always have a STOP Loss in place. Do NOT enter a trade without a STOP Loss!
Rule #3: Ride winners.
It is always better to ride a winner than to cut it short and take profits.
If you think about all the people you know who are average, or even below average in their investing performance, they all have one thing in common. They tend to take profits too early or cut their winners short (or both). The lesson here is that when you have a winner and it's going up, ride it as long as possible because there's nothing wrong with making money on an investment that is doing well. There are no guarantees that an investment will continue its upward trend forever, but if we're going to make money on investments at all then we need some kind of edge over other investors who don't have any edge at all.
Understand how your Index moves and know the rules for EXIT. My two favorite SIGNALS are:
1. Exit when the Heikin-Ashi candles change direction and/or
2. Price Actions reach a major RESISTANCE.
Rule #4: Keep your position sizes small.
The fourth rule of the Market Wizard's Rules for WINNING! is to keep your position sizes small.
Position size refers to the amount of money you invest in a single trade, or "position." It's important that you know how much money you're putting at risk on each trade before you make it. This will allow you to manage risk better and avoid blowing up your account. A good rule of thumb is to keep your positions no more than 1% of your account balance (this means risking $1 for every $100 in your trading account). If a trade moves against me and I lose more than 1%, I'll get out and wait until the market goes back up again before trying again. Why? Because getting stopped out after losing 3-5% hurts too much; it takes away all my profits from winning trades!
Rule #5: Follow Your Trading Plan.
The Market Wizard's Rules for WINNING! are very straightforward, but they're not easy to follow. For example, in the first and second rules you were told to "have a plan" and "don't deviate from your plan." It's natural to want to deviate from your plans at times because things don't go as expected or because something unexpected happens that changes your mind about where you should be putting money in or taking profits out of a position. The key here is that if there is no deviation from the original plan then there won't be any emotional decision-making involved with investing decisions. An emotionless investment strategy will always outperform an emotional investment strategy, so don't deviate from the original plan unless there is some new information that makes it necessary for you do so (e.g., news about a company).
Another thing worth mentioning is not being afraid of taking losses or profits when they are available. You should always take money off the table when it's available by exiting positions when stops are triggered or closing out trades early due to price action signals that show good risk/reward ratios (e.g., breakouts into new highs).
Rule #6: Know when to break the rules.
Sometimes you have to break the rules. If a rule is preventing you from achieving your goals, then it’s time to stop following it. If a rule is getting in the way of your progress, but not stopping you from making progress — then do what works for you and ditch the rest.
Follow these rules, and you will be more successful in trading
Whether you are a beginner or an experienced trader, there are certain rules that you must follow in order to be successful in trading. These rules may not be set in stone but they will definitely help you achieve your goals if followed properly.
Always learn from past mistakes
Never get attached to a specific method
Know when to cut losses and walk away
- Take small position to keep your risk low
- Average your trades in the long term over higher win probability
- Use Asymmetric bet when trading - high RRR
In the end, it's all about making money. The Market Wizard's Rules For WINNING! doesn't promise that you'll make a fortune overnight or even in a few days. The only thing it promises is that if you follow these rules, over time—and with patience and dedication—you will surely have a better chance to win at trading.