Ed Seykota’s contribution to trading is usually summarised as computerised trend following, and while that is accurate, it understates the more interesting part of his thinking. What makes Seykota worth studying is not just that he built mechanical systems before most traders had heard the term. It is that he arrived at a view of trading psychology that treated the trader’s behaviour as part of the system, not as a separate problem to be solved later. Most trading education treats method and psychology as distinct subjects. Seykota treated them as the same problem looked at from two different angles.
He was born in 1946 and earned dual degrees from MIT in 1969, one in Electrical Engineering and one from the Sloan School of Management. That background mattered because it gave him both the tools to build mechanical trading systems and the analytical framework to think about what those systems were actually doing. In the early 1970s, he began using early mainframe computers to develop and test trading rules systematically. At a time when most traders relied on fundamental analysis, gut instinct, and broker relationships, this was an unusual approach. He was among the first people to apply computerised testing to trend-following strategies in commodity markets.
The result he is most associated with is a client account he managed between 1972 and 1988. Starting from $5,000, the account grew to nearly $15,000,000, according to widely cited accounts including Jack Schwager’s “Market Wizards.” The figure represents an extraordinary compounded return over that period. The primary driver was catching several of the largest commodity trends of the 1970s and early 1980s, particularly in metals and agricultural markets during the inflationary decade. He was not predicting those moves. His systems were identifying emerging trends through price behaviour and positioning with the direction of the move, holding through normal volatility, and exiting when the trend reversed.
What Systematic Trend Following Actually Means
The term systematic trend following is sometimes used loosely. In Seykota’s case it had a specific meaning. A systematic approach means that the rules for entry, exit, and position size are defined completely in advance, with no discretionary override based on opinion, news, or feeling. Every decision the system makes is a product of price data and a set of rules. The trader’s job is to execute those rules consistently, not to improve on them in the moment.
Seykota’s systems used exponential moving averages as the primary trend identification tool. An EMA gives more weight to recent prices, making it more responsive than a simple moving average to changes in trend direction. When price crossed above the EMA, the system was positioned long. When price crossed below, the position was reversed or closed. The specific parameters varied by market and by period, but the underlying logic was consistent. Price behaviour was the input. The system’s response was the output. Human judgment was removed from the process as much as possible.
The reason for removing discretion was not distrust of intelligence. It was an observation about what actually happens to intelligent traders under pressure. When a trade is going against you and the loss is real, the natural response is to find reasons why the original thesis was still correct, why this pullback is temporary, why adding to the position makes sense. These responses feel rational. Seykota’s view was that they were forms of ego involvement with the position that consistently produced worse outcomes than simply following the rule. The system’s exit signal existed precisely for those moments. Overriding it was not using judgment. It was refusing to accept information.
The Commodity Markets That Made Trend Following Highly Effective
Seykota’s most productive years as a trader coincided with one of the most favourable periods in history for trend-following strategies in commodity markets. The 1970s were characterised by persistent inflation, supply shocks, and geopolitical disruptions that created multi-year trends in gold, silver, oil, and agricultural commodities. These were not brief moves. They were sustained trends with enough duration that a system requiring months of confirmation to enter and exit could still capture a large portion of the move.
This context is important for modern traders evaluating the method. Trend following in commodities during the 1970s and early 1980s was operating in a specific market regime. Extended, high-momentum trends in those years made the approach exceptionally productive. Markets with shorter trend duration, more frequent reversals, or lower sustained momentum produce more whipsaws for trend-following systems and reduce the ratio of average win to average loss that makes the approach viable. This does not invalidate the method, but it means performance should be evaluated across full market cycles, including the periods of choppy, range-bound markets that reduce trend-follower returns, not just the dramatic trending periods.
The choppiness index measures this distinction. High choppiness readings indicate markets where trend-following systems tend to struggle, producing multiple small losing trades as the system enters and exits repeatedly without catching a sustained move. Low choppiness readings indicate trending conditions where the method performs better. Seykota’s systems implicitly experienced both conditions across a long career, and the results from the commodity boom years represent the more favourable end of that range.
The Loss-Cutting Priority and Why It Is Stated Three Times
When Schwager asked Seykota in the “Market Wizards” interview what the elements of good trading were, the reply was: cutting losses, cutting losses, and cutting losses. The repetition was deliberate. It was not a throwaway line. The tripling is an argument that of all the things a trader needs to get right, loss control is the one that determines whether the system remains viable long enough to benefit from winning trades.
The mathematical reason is asymmetric. A loss of 50% requires a 100% gain to recover. A loss of 20% requires a 25% gain to recover. The larger the drawdown, the harder the recovery, and the more that the winning trades need to do in order to make the account whole again. Trend-following systems accept a certain number of losing trades as a built-in cost. The trades that fail lose a small amount because they are exited quickly when the trend does not develop. The trades that succeed can hold for weeks or months, allowing the system to make back many times the amount lost on the failures. This works only if the losses are actually kept small. A trend-following approach where losses are allowed to grow by overriding stops or hoping for reversals destroys the ratio that makes the system viable.
For modern traders applying this thinking, the Ulcer Index provides a useful measure of the quality of drawdown management. It captures not just the depth of drawdowns but their duration, which is relevant because a series of moderate but extended drawdowns can be just as damaging to performance as a single deep one. Seykota’s emphasis on loss cutting speaks directly to this. Shallow, short drawdowns allow the system to recover quickly and compound. Deep or extended ones require a prolonged period of above-average returns just to break even.
Position Sizing and the Balance Between Survival and Opportunity
Seykota articulated a principle about position sizing that captures a genuine tension in trading: risk no more than you can afford to lose, and also risk enough so that a win is meaningful. Too little risk and the winning trades produce insufficient return to offset the losing trades and generate net growth. Too much risk and a string of losses destroys the account before the winning trades arrive. The sizing that resolves this tension is specific to each trader’s system, loss frequency, and average win-to-loss ratio.
The ATR bands for swing stops give one way to calibrate position size to market volatility. A volatile market has wider ATR values, which means a stop placed at a standard multiple of ATR will be further from entry. Holding fewer contracts or shares in that market keeps the dollar risk per trade consistent even though the point distance of the stop is larger. This kind of volatility-adjusted sizing is consistent with systematic thinking, because it prevents the system from taking on disproportionate risk in high-volatility periods simply because the nominal entry conditions were met.
Seykota’s first goal, by his own explicit ordering, was survival. Not profitability. Survival. The implication is that position sizing should never threaten the ability to continue trading. A bet large enough that a single losing trade produces a portfolio-level crisis is not a risk-management decision. It is an account termination risk. Systems that survive produce returns over time. Systems that blow up do not get a second chance to benefit from favourable conditions that arrive later.
Seykota on Trading Psychology and the Mirror Observation
In the “Market Wizards” interview, Seykota offered an observation that has been discussed and debated in trading education for decades. He said: win or lose, everybody gets what they want out of the market. The surface meaning seems odd. Why would anyone want to lose money? The deeper meaning is that trading behaviour reflects psychological needs that may not be consciously acknowledged. A trader who repeatedly overrides stops and holds losing positions to large losses may be satisfying a need for drama, for the feeling of being right, or for external validation, at the cost of actual profitability. A trader who exits winners prematurely may be satisfying a need for certainty or avoiding the anxiety of an open position. The market becomes the arena where these needs play out.
This is not a gentle observation. It implies that improving trading results sometimes requires understanding what the trading behaviour is actually providing, not just adding better rules. A new stop-loss discipline layered on top of unexamined psychological patterns often does not survive the first period of pressure. The trader follows the rules when the conditions are comfortable and breaks them when the emotional stakes are high. The rules exist precisely for the high-stakes moments, so this failure is not incidental. It is structural.
The Trading Tribe Process, which Seykota founded in 1992, was his response to this problem. By bringing traders together to discuss their psychological patterns around trading, he was creating a context where the behavioural component of trading could be examined directly. His view was that a system’s failure often had more to do with the trader’s incompatibility with the system’s demands than with flaws in the system itself. A perfectly designed trend-following system in the hands of someone who cannot tolerate being wrong frequently, or who finds it psychologically intolerable to hold through a temporary drawdown, will produce worse results than the system’s design would predict.
The Relationship Between Rules and Human Judgment
Seykota’s position on the relationship between systematic rules and discretion was more nuanced than a simple dismissal of judgment. His view, captured in another widely cited line, was that the markets are the same now as they were years ago because they keep changing, just like they did then. The paradox points at something real. Specific market conditions change constantly, but the patterns of human behaviour that drive price action, fear, greed, momentum, overextension, recur across all periods and instruments. A system built on durable behavioural patterns rather than specific market conditions has a better chance of remaining useful over time.
He also recognised that a system must match the trader. A perfectly backtested trend-following approach that requires holding positions through 30% to 40% drawdowns before capturing the major move will not be executed consistently by someone who experiences that magnitude of loss as emotionally intolerable. The rule says hold. The person closes the position. The system’s long-run advantage never materialises because the trader exits before it can appear. This is not a failure of discipline alone. It is a mismatch between system design and trader psychology. The solution is either to adapt the person or to adapt the system, not to insist that better willpower will close the gap.
For modern traders, this suggests that choosing a trading approach is not just a question of which method has the best backtested results. It is a question of which method you can actually execute consistently under adverse conditions. A simpler system that you can follow reliably produces better outcomes than an optimised system you abandon during the first difficult period.
What Seykota’s Method Looks Like for Equity Traders Today
Seykota traded primarily commodities, where his systematic approach fit naturally. Modern equity traders can apply the same principles with appropriate adaptations. The core is trend identification, which for equities typically means using moving averages of different lengths to determine whether a stock or index is in an uptrend, a downtrend, or a sideways condition. A stock where the short-term moving average is above the longer-term moving average, with both sloping upward, is in the kind of trend structure that a systematic approach would want to be long in.
The moving average crossover system is the most direct translation of Seykota’s approach to equity markets. When the shorter-term average crosses above the longer-term average, the system enters long. When it crosses back below, the position is closed or reversed. The specific parameters, 10 and 30 days, 50 and 200 days, or any other combination, determine the sensitivity. Shorter lookback periods produce more trades and more whipsaws. Longer lookback periods produce fewer trades, larger drawdowns on individual positions, and better capture of major trends when they develop.
The SuperTrend indicator applies a similar logic with a volatility adjustment built in. The trailing stop adjusts to recent volatility, tightening in calm markets and widening in volatile ones. This prevents the system from exiting a position on normal volatility noise while still catching a genuine trend reversal when it occurs. Combined with a moving average for trend context, it provides a practical framework for systematic trend-following in equities that captures the essential features of Seykota’s approach without requiring the same computational infrastructure he was working with in the 1970s.
The Limitation Worth Taking Seriously
Trend following as a strategy class has faced documented periods of underperformance, particularly in equity markets that experience frequent reversals and sector rotations rather than sustained directional trends. The 2010s were in many respects a favourable period for buy-and-hold equity exposure in major indices, but a challenging one for pure trend-following systems that frequently entered and exited based on short-term moving average signals. The whipsaw problem, entering a trend, getting stopped out, and re-entering at a worse level repeatedly, reduces returns during range-bound and mean-reverting market environments.
Seykota was aware of this. His comment that good systems tend to violate common sense was partly about this: trend following feels wrong during the choppy periods when it is producing a series of small losses, and feels obvious during the trending periods when it is capturing large moves. Traders who evaluate the method only during its favourable periods, or who abandon it during the unfavourable ones, are not actually applying systematic discipline. They are applying a hybrid approach that captures some of the losses and misses some of the gains.
The practical lesson is to evaluate any trend-following approach across a complete cycle, including the difficult stretches, before concluding whether it fits your goals and temperament. The periods when it is working are not the test. The periods when it is producing small losses repeatedly while you watch other approaches perform are the real test of whether you can apply it consistently enough to benefit from the major trending periods when they eventually arrive.
What Seykota’s Career Still Offers Traders
Ed Seykota’s work is useful not as a template to copy directly, but as a clear statement of several principles that hold across different methods and instruments. Cut losses quickly, every time. Let winners run by staying with the trend until the trend ends, not until you feel like taking profit. Size positions so that losses are survivable and wins are meaningful. Build rules that you can follow under pressure, not rules that sound right in theory but collapse when the position is against you. Treat your own trading behaviour as information about your psychology, not just about the market.
Those principles do not require a mainframe computer or a commodities account. They apply to any approach, in any instrument, on any time frame. The specific tools Seykota used, exponential moving averages, mechanical entry and exit signals, systematic position sizing, are now accessible to any trader with a charting platform. The harder part is the psychological discipline he described. Understanding what your trading behaviour actually reveals about your relationship with risk, certainty, and the need to be right is work that no indicator can do for you.
His career demonstrated that a systematic, rules-based approach to trend following can produce sustained results across many years and market environments. It also demonstrated that the psychology of execution is not a soft add-on to the technical method. It is the central problem. The systems are available. The discipline to follow them, particularly when they are losing, is the variable that separates outcomes.
Recommended Books about Ed Seykota
The following books may help you study the trading styles, market context, psychology, risk management, and methods associated with well-known traders and investors.
Disclosure: As an Amazon Associate, I earn from qualifying purchases.
- Market Wizards by Jack D. Schwager
This book includes Ed Seykota and is one of the most important sources for studying his trend-following philosophy and risk discipline.
- Trend Following by Michael Covel
This book is relevant for understanding systematic trend following and the trader mindset associated with Seykota’s approach.
- The Complete TurtleTrader by Michael Covel
This book is useful context for trend-following systems, rules, position sizing, and trader discipline.
Disclaimer: Educational content only. Not investment advice. Trading involves risk. You are responsible for your decisions.