Jan 31, 2003
about something you wrote. I would rather you not post this on
your web page ...
enables you to interact with me and with others for free. if you wish a
private audience, you might try hiring a consultant.
faith or lose the faith
I have one
question in relation to the difference between faith and rational
self-confidence. Question: Many entrepreneurs, visionaries, and/or
traders have claimed that having "faith" in themselves was a
key element in achieving success and maintaining their visions,
especially in the early stages of their careers. Lenard Peikoff told me
one should not have "faith" but rather "rational
self-confidence". Clearly, the difference lies in ones own
references. However, in the absence of objective references, how does
one maintain a vision without an element of "whim-taking" or
"faith". I would sincerely appreciate any thoughts you might
have on this, especially in regards to entrepreneurship.
in a system, rational self-confidence, sense of destiny, divine
ordinance, life mission, dedication to a higher purpose, right
livelihood ... all describe the feeling of traders for whom trading is
not just something they do ... for them, trading is something that does
Note that if you maintain the
vision, the vision maintains you, especially during key events like
run-ups and draw-downs.
Give us a
real world example
Would you be
able to display a chart of a recent trend that you traded with entries,
additions and exits. Just to give us a real world example. I am trying
to gain more knowledge in this area and their aren't many sources on the
web. I want to see some alternate views. Any idea on a scheduled release
date for your book?
I do not discuss specific trades, in public forum, any more than a
doctor might publicly recommend "the right type" of
When you develop a context of
risk management and portfolio selection, compatible with yourself, an
appropriate trade timing method will suggest itself.
(2) No date set yet.
interview in the book "Market Wizards," Jack's question: What
do you mean, "The stock market behaves differently from the stock
market"? Ed's answer: The stock market behaves differently from
itself in that easily identifiable patterns seldom exactly repeat.
1) What markets offer patterns that exactly repeat?
2) Is applying a trend following approach to the stock market a mistake,
should my efforts be more concentrated on the futures and currencies
3) Have you scheduled any dates for future Trading Tribe meetings? Any
idea on costs?
The pattern of suspended, closed and otherwise inactive markets seems
rather repetitive and predictable.
(2) You might just be the best
source for answers about where to concentrate your efforts. See if you
can schedule some time with you, to talk it all over.
(3) No. Lots of ideas appear
recently been reading some material on reversal traders... traders that
are always long and short because they continuously reverse their
positions with the trend. Can you give me your thoughts on the merits of
this strategy. Would the strategy be prone to whipsaw losses?
time constant of the system, such as length of moving average, is more
important than whether or not the system reverses.
To avoid whipsaw losses, stop
I cannot agree more with you. Its all about knowing how to live through
drawdowns. That's why I am doing all this research after all. Only
testing my approach in and out gave me the confidence to trade it in
good and in bad times. That's why I wrote my own back testing engine. I
wanted to be sure that my systems are robust under various market
conditions and that my position sizing will give me a smooth touchdown
during drawdowns. I also work myself day by day through portfolio tests
to get a feeling for drawdowns. All those tests helped me a lot to
remain calm during my last drawdowns. I even enjoy it if my real
drawdowns are similar to my back tests because this means that my
back testing assumptions are right and my trade execution is
One Would Fade the System
I recall your earlier site had a section on Magazine covers, as an
indicator of significant turning points.
If a trading signal is generated by a computer tested system, in the
direction of the broad consensus ( i.e. magazine covers ) presumably one
would fade the system generated signal. Wouldn't this then alter the
back-tested system's performance, as well as the theoretical drawdowns ?
Do these interventions validate your trading rule - 'Know when to break
the rules ...' ?
wonder how to back-test your presumption.
Determine how much heat you can take.
Sell until you are comfortable with the size.
Don't buy what others think is good.
If you are not comfortable with the chart, move on.
Just because a stock is down a lot doesn't mean it's a good bargain.
If you want to buy, buy with a meaningful size.
I figured I
was putting on 1-2% positions which were not meaningful enough. Now I
try for 5% positions.
Relationships More Meaningful
First, while a
few hot dates are always a lot of fun, I have always found an ongoing
relationship to be more meaningful. Thus, rather than two weekends and a
follow-up, I vote for something longer-term. Paying a monthly or
quarterly fee determined by the market sounds reasonable to me.
Second, What would you consider to be your most influential beliefs?
I agree. That is the basis of the original Trading Tribe.
(2) I prefer influential beliefs
to believing in influentials.
Like Very Much Heat
I understand that Tom Basso does not like
very much heat (25% drawdowns max). Am I correct?. Still my portfolio
would not have a drawdown bigger than 25% even if my portfolio risk is
around 50% and my position risk is at max 5%. Those numbers have no
linear dependency. It all depends on your approach, systems and so on.
I've almost given up on trying to explain this to anyone via email since
I get the feeling that my English is not sufficient enough to make
things clear. All the peaces of the trading puzzle together are
responsible for max drawdown and the probability of it, not just the
portfolio or position risk.
Just don't try to take anyone's numbers for yourself (even if those
people are market wizards). Run portfolio tests and monte carlo
simulations to find your own optimum for your heat acceptance.
about how to estimate drawdowns is no substitute for knowing how to live
request if you could provide your insight into my current trading
strategy. I am a pilot in "real life" and trader at night.
I currently use a 1/20 day SMA, plus OBV, plus RSI (all set to 20 days)
to determine when trends will occur, or more correctly, if they have
occurred. I also pay attention to the stock's group strength and also
the trend of the overall market.
So far, this technique has worked pretty well. If you have any
suggestions or opinions, they are highly desired.
Mr. Seykota, you are a "idol" and I follow your ideas and the
works of Richard Donchian and other trend followers religiously. Even on
autopilot at 30,000 feet, I read and re-read the Market Wizards and my
to trading with the trend is an important step.
Choosing a consistent definition
for "trend" is an important part.
Other parts include position
sizing, managing risk and maintaining attitude.
Before you can get to auto pilot
status with your trading, you might have to do some flight simulations,
particularly ones in which you test your own G tolerances to the system.
Since you have practical
experience with air flows, you might be able to give me an opinion on my
theory of lift at http://www.seykota.com/rm/
This is out of
the German magazine called Trader´s. Van Tharp wrote the article and I
think it is just a bad translation. I think you used
"gunslinger" in market wizards.
community in which the citizens are allowed, even required, to posses
guns might be a less risky place to live than one with gun control.
A portfolio with purposeful risk
control might be less risky than one without.
Drawdown Defines Heat
I fully agree
with you that heat is defined by max drawdown. Drawdown again is
influenced by the position sizing approach. For example by the
percentage risk for a trade. You made some statements (in the wizards
interview and on a seminar mentioned in a van Tharp interview I read
today) that anyone who risks more than 3-5 percent is a hazardeur. At
this point I do not agree with you. This may be true for your personal
systems\approach but it is impossible to make a general statement.
Here are just some points that lead to different drawdown numbers based
on the same percentage risk.
1. Stop size. Small stops lead to a very low number of winners and a
very high R-multiples. Such systems will cause bigger drawdowns over
2. Timeframe: Intraday traders take more risk and might have higher
drawdowns because of higher slippage. Worst case moves have a much
3. How often do you really realize the maximum loss?. If you use very
large trailing stops your average loss will probably be below 0.5 that
4. The money management approach: You might take high risks between 0
and 20% drawdown, but reduce risk below 20% to insure a safe landing for
For me it is possible to put 10% at risk because only one trade out of
100 will really take a loss this big. And those trades are the ones with
exceptional risk/reward ratios (normally entered at low volatility). I
ran montecarlo simulations over my portfolio tests and even with a max.
risk this big I have a chance below 95% to reach a 60% drawdown because
of my very long term, highly diversified approach with very large
initial stops. I also reduce risk during drawdowns.
don't recall using the term "hazardeur," or even hearing it
before today. I would be interested in the exact source of the
quote from me.
In general, a betting strategy
based on a series of 3 % bets would tend to be more volatile than one
based on 1/2 % bets.
I would consider the later to be
about standard for the industry and the former to be on the risky side.
Of course, if your goal is to
risk a lot in hopes of winning a lot, then a conservative approach might
just be too risky.
As I don't
know any of the folks on your FAQ site, for now I would prefer not
having any of my correspondence posted. Thanks.
you do not wish to share your process with others, you might consider private
|January 14, 2003
Commercial Economy and Gift Economy
As discussed, here are my first thoughts and feelings with regards to
the Trading Tribe.
Generally, there are two types of economies
- The commercial economy and the gift economy. In one, reward and
reputation are based on having and in the other, reward and reputation
are based on giving.
I found the following quote by Pam Withers
to be interesting and relevant:
"The gift economy is a concept that
has been around ever since First Nations people held potlatches and
their Caucasian neighbors held potlucks. At potlatches and potlucks,
everyone contributes something; everyone takes something away. The more
and better you bring, the more respect you command. More than bartering,
the gift economy - like potlucks - implies a social context and is the
basis of relationship building."
While there is no doubt whatsoever that there would be significant
demand for commercial seminars, I feel that the spirit of The Trading
Tribe lives in giving and collaboration on an ongoing basis.
I would like to be involved in a group that gathers quarterly as it will
allow the whole group time to make progress towards their goals and be
accountable to the group for their progress.
From a financial standpoint, I believe that while there is no
"model" to determine how much one can earn from this type of
group, the amount would far exceed anything one could earn from a
These are my first thoughts. My mind is wide open to alternatives and
discussion. Let me know how I can help.
wonder how you might propose to compensate the organizers and marketers
who might bring such a group into being in the first place.
Passionate Niche Players
being able to reach so many people in so many different places around
the world is a blast ... look at your site and it just started and
people are there ready to connect with you ... big media firms are
destined for problems as more and more people realize the power of
inter-connected networks (Metcalfe's Law) ... big media guys can never
compete with passionate niche players that love what they do ...
agree ... although I feel there is a lot of value added by large central
clearing nodes, that add quality control ... such as yahoo, google,
drudge, turtletrader, etc ... fyi ... Metcalfe was a classmate of mine
I have been
thinking about this for a while. Service and giving imply that one has
something to give. I think we recognize how much we have by just showing
up in service. Giving is a great mirror of what is important at the end
of the day.
Within a relationship between two people there will always be 2
perspectives, 2 realities. Something which I heard and like was,
"All that is not mutual is dropped". The meaning that the
other person assigns to my actions/communication is more important and
interesting to me.
Suppose I walk past a homeless drunk on the street. He asks me for a few
dollars to buy beer. I can:
1. Give him money - He will be grateful.
2. Not give him money - He will be disappointed.
Is it service to fulfill his request, whether I agree with his lifestyle
or the "right/wrongness" of his request? I have been thinking
on this question for a while, hoping to respond with an answer, hence
the long delay.
It could be ones own spiritual growth that comes from giving him money
regardless of my beliefs otherwise.
Who are we to judge the rightness or wrongness?
So I go down a logical level to "Is this useful?" Maybe it is
most useful to him to have a beer. Maybe I think it is not useful for
him to drink beer, because he lives in a box by the train station. That
only imposes my values on him.
Are there universal values outside of our perception?
For me, I believe that we all have the right to life and free will,
provided we do not impede others right to life and free will. It is his
free will to live in a box and drink beer if he chooses to do so. So
where do you fit in spiritual growth here?
Thanks for the dialogue, I appreciate bouncing these ideas around. Sorry
for the long wait.
something to someone may or may not be of service to either party. Then,
when you consider having to guess what is right and wrong to give, the
transaction becomes even more complex. I like the model of free exchange
by consenting parties, so both parties perceive a benefit.
I have been trying to figure something out for a few years now and after
I read your site on radial momentum I thought you might have some
insight into my query.
On a recent overnight flight to Europe I couldn't get much sleep and
started thinking about and calculating flight times. Looking at one of
the airline magazines I noticed that it takes about 1 hour longer to fly
back from Europe than going there. Thinking about this for a few minutes
I came to the conclusion that is must be because of the rotation of the
earth. Not satisfied with my conclusion I got up and asked if I could
speak to the pilot. I asked him the question and his response was a
little sketchy. He told me it was complicated and had to do with head
winds/tail winds and flight speed. Again not being satisfied with the
response I asked another pilot that lives in my community. His answer...
has to do with wind.
I have tried to search for this topic on the internet but haven't had
much success. Would you happen to have any knowledge of this topic? If
so, could you share your thoughts with me.
wind would tend to slow the plane, lengthen the travel time while tail
wind would have the opposite effect.
These days, depending how you do
it, getting up from your seat and asking to talk to the pilot might have
a very substantial effect on travel time.
Ed, Hi if you
had to choose five tools to help you with your trading what would you
I had to choose five tools for trading, I'd likely stop trading for a
while, until this curious restriction expired. So the tools would
likely be recreational and amusing.
To the extent
that you can train the participants in a structured manner, with each
online seminar devoted to say one aspect of the trading life at a time,
followed / interspersed by a session for answering selected questions; I
think this will bring in a huge global group.
For example -
The trading rule states ( I rely on your Wizards interview and from The
Traders Window )- Trade the long term trend. Your definition of a long
term trend is one making a historic high. This is one invaluable aid in
stock selection for me since. I hope that I have been able to
communicate effectively on this issue, for if this does materialize I
have no doubt that the number of global participants will be staggering.
all these online seminar recordings can be frequently re-telecast;
saving a tremendous amount of your time ( as well as taking care of
different time zones ). Additionally, newcomers could view these
recordings before signing up for live seminars too ( as a lower priced
sample. ) I do hope you will find these suggestions useful.
Congratulations on your great new website, and I do wish that the
Physics section gets the maximum possible exposure. Great work.
seminars mostly deal with the psychology of trading, within the context
of a support group. The assumption is that most traders already know the
basic principles of trading, and they appear at the seminar with the
wish to develop the habit of sticking to the principles.
Much of the
"information" communicates as facial expression, body posture,
tone of voice and other personal expression. Much of the support comes
from other traders who learn to detect alignment (or lack of it) between
what the trader in the "hot seat" says and how he acts.
I would think some kinds of
associations are best conducted in person, like marriages, AA meetings,
New Year's Eve parties and my seminars.
Tribe, Risk, Heat, Feelings and Market Selection
through the Trading Tribe's FAQ and read XXX´s
posting regarding heat. I think there is some misconception that
heat can be expressed as a fixed percentage of capital. In my opinion
that's wrong for two reasons. First different trading approaches need
different risks assigned. A system with very wide stops might result in
two loosing trades in a row while a system with very tight stops might
lead to 10 losers in a row. If you would like to stay within a 10%
drawdown you should assign 5% risk to approach one and 1% to approach
two (just a simple example). If you trade both systems at the same time
you cannot go with one number alone. Second: Some people might
"feel" more heat taking 10 small loosing trades and others are
more uncomfortable taking 2 big losers, even if the drawdown is the
same. Another thing which I see seldom discussed is market selection. I
think this is at least as important as heat. For example have you ever
come up with a good system trading live cattle? I did not. And does
anyone think that the live cattle market will start trending smoothly
some day? Why, or why not?
define heat as portfolio percent drawdown. I coined the term while
writing a paper on risk management with Dr. Dave Druz. Heat, in this
sense includes trading style, trading frequency and stop placement
A good system for trading cattle
is to buy a lot of contracts before the big rise, and then to sell it
all out at the top. And if it doesn't go up, well, then don't buy it in
the first place.
(1) Is there a
way of using the Trading Tribe site to interact with other traders? (2)
Do you monitor quotes during the day, constantly watching the tape for
the markets you trade?
This FAQ site is like a talk show -- you get to share your views and
questions, and read those of others. (2) No.
That chair is
great, but I've found out I fear a whack in the back of the head from my
wife more than high voltage.
if your goal is still to set up aversion therapy for an over-active
trading-software mouse, and if your wife's whacking provides an
appropriate level of aversion, I suppose you could connect the mouse to
May I suggest
that on-line seminars be considered by you, this will bring in many more
enthusiasts who may not be able to visit Incline.
wonder if you might suggest a structure for on-line seminars.
A Note from
the Chair Man
Just when I
wondering what I can do, currently being jobless, down with a flu, lost
my last 4030 Singapore dollar shorting NASDAQ futures, my daughter
school fee not paid, you send me an email with an electric chair. What a
great way to start 2003!
that case, no "charge."
of the significant issues I need to clarify is how much ‘heat’ is
optimal for my trading portfolio.
In some prior exercises you gave me, you suggested a good trader
might expect to have 50% of his trades profitable and 50% unprofitable,
and that he might also make 2x bet size on those winners.
As a novice, I am going to speculate that initially I will make
1.5x bet size on my profitable trades.
After running the simulation in excel, it suggests optimal heat
of 17% (though 17% may not be attainable given the capital required for
stocks). Does this sound
of heat and risk have to do with your tolerance for risk, your fears and
hopes and such ... how come you think there is anything reasonable about
these matters ...
Can I ask you
two simple question? (1) How long did it take you before you were
comfortable in your ability to trade the markets? (2) When you felt you
knew about you were doing.
If comfort is your goal, stop trading.
(2) Feeling you know what you are
doing is optional.
Do you have
anything that will send a high voltage current to the seat of my chair
when my mouse finger gets too twitchy.
already in place. The motion of your finger sets up a high voltage
static charge that communicates through your body to the chair. The
current, however, is miniscule so you do not feel anything. If you want
more of a jolt, you might like to try something like this ...
Hey buddy. Are
you Ed Seykota? I work hard all my life and still got retrenched. Read
that you are a great trader. Can you teach me a trick or two? Cheers, Ho