Ed Seykota: Trend Following Pioneer From Market Wizards

Ed Seykota is one of the first traders who let a computer make his trading decisions, long before personal computers existed. In the early 1970s he tested trend-following systems on punch cards and on a borrowed IBM 360. Then he managed money with them for decades from a house at Lake Tahoe.

Most traders know him from one book: Market Wizards by Jack Schwager. Schwager called him one of the best traders of his time and printed a track record that still gets quoted today. That record is also the source of many exaggerated numbers on the internet, so this article sticks to what the book itself says.

Seykota is more than a system trader. He is a musician, he wrote the Whipsaw Song about the rules of trend following, and he built the Trading Tribe, a network of traders who work on the psychology behind their results. This article follows our editorial policy. It is for education, not investment advice, and past results do not predict future returns.

Ed Seykota in 30 seconds

• Pioneer of computer trading: in the early 1970s he developed what Market Wizards calls the first commercial computerized trading system for client money in futures.
• Documented record: one customer account started with $5,000 in 1972 and, by mid-1988, was up over 250,000% on a cash-on-cash basis.
• Trend follower first: his style is trend following with some pattern recognition and money management rules.
• Mentor of Michael Marcus: Marcus named Seykota as the person who did most to turn him into a successful trader.
• Psychology: his best-known line is that everybody gets what they want out of the market, and his Trading Tribe works on exactly that.
• Musician: in the Whipsaw Song he sings the essentials of trend following, from riding winners to using stops.

Who is Ed Seykota?

Ed Seykota is an American futures trader and MIT graduate who built one of the first computerized trend-following systems for client accounts in the early 1970s and became famous through his interview in Jack Schwager’s Market Wizards (1989).

Seykota was born on August 7, 1946. He studied at the Massachusetts Institute of Technology (MIT). Market Wizards mentions his degree in electrical engineering; a 2018 Benzinga article, which Seykota links on his own website, adds a degree in management and dates both to 1969.

He came to the markets through a lost bet on silver. In the late 1960s he expected silver to rise once the US Treasury stopped selling it. He opened a margin account, bought, and watched the price fall until his stop was hit. That loss taught him how markets discount news, and he became fascinated with how prices really move.

Name	Ed Seykota
Born	August 7, 1946
Education	MIT, electrical engineering (and management, per Benzinga)
Markets	commodity and financial futures
Style	computerized trend following
Known from	Market Wizards (1989), The Trading Tribe (2005)
Website	seykota.com

Sources: Jack D. Schwager, Market Wizards (1989); Benzinga, August 7, 2018; seykota.com.

The first computerized trading systems: punch cards and an IBM 360

Seykota’s first job on Wall Street, in the early 1970s, was as an analyst at a major brokerage house. He covered the egg and broiler markets. Management wanted trading advice even when he saw no opportunity, and the head of the computer department kept him away from the machines. After about a month he quit.

At his next brokerage house he tested trading systems at the weekend. The firm had just been reorganized, so there was little supervision. He used the accounting computer, an IBM 360 that filled an air-conditioned room. Over about half a year he tested around a hundred variations of four simple systems on roughly ten years of data for ten commodities. The results showed that trend-following systems could make money.

Management then used his research to manage client money. In his own words, he developed the first large-scale commercial computerized trading system. Several hundred agents of the firm sold the program, and the money under management reached several million dollars, a large sum in the early 1970s.

The system worked, but management kept overriding it. Seykota tells the story of a buy signal in sugar at around 5 cents. Management thought the market was overbought and waited for a pullback that never came. They finally bought near 9 cents, just before the top, and then ignored the sell signal too. The best trade of the year became a loss, and many accounts lost money in a year in which the system itself would have gained about 60%.

This meddling was one of the main reasons he left the research department. Management also wanted him to make the system trade more often to earn more commissions. He stayed on as a broker for about two years and then became a money manager on a pure profit incentive fee, because he felt that commissions are the wrong motive when you manage other people’s money.

His influences: Donchian and Reminiscences of a Stock Operator

Seykota calls himself a self-taught trader, but two sources shaped his first system. One was Richard Donchian, the pioneer of trend-following systems, whose published letter suggested that a purely mechanical system could beat the markets. Seykota tested that idea on punch cards and found it held up.

The other was the book Reminiscences of a Stock Operator by Edwin Lefèvre. The book is a thinly disguised account of the speculator Jesse Livermore, first published in 1923. Seykota named it next to Donchian’s five- and twenty-day moving average crossover system and his weekly rule as the sources he learned from.

His first system was a variation of Donchian’s moving average system. He used an exponential moving average because it was easier to calculate and calculation errors faded over time. At the time the method was so new that traders passed it around by word of mouth as the “expedential system”.

The system keeps evolving

Over the years Seykota made his system more flexible and adapted it to his own personality. His first version had hard rules with no room for deviation. He found it hard to follow, jumped in and out at the wrong times and thought he knew better than the computer. As he trusted trend trading more, he added more “expert trader rules”, pattern recognition and money management algorithms.

His point is that a trader has to be compatible with his system. Systems do not need to be changed, he told Schwager; the trick is to find one you can actually follow. Even a system trader still makes discretionary decisions: how much risk to take, which markets to trade and how fast to grow or cut the trading base. Anyone who builds rules today will recognize this from backtesting, where the hardest part is often the trader, not the code.

Michael Marcus: the student who learned from him

Michael Marcus met Seykota in October 1971 at his broker’s office. In Market Wizards Marcus describes him as a genius who had recently graduated from MIT and had written one of the first computer programs for testing technical systems. Seykota got him into the firm’s new research group.

Marcus says Seykota taught him to cut his losses and to ride his winners. He also learned patience from him: Seykota stayed short in a falling silver market while everyone else was bullish. Later Marcus watched in agony as Seykota stayed long in the great soybean bull market while he himself had taken his profits too early. You can read his full story in our profile of Michael Marcus, who credits Seykota as his mentor.

Ed Seykota in Market Wizards: “one of the best traders of our time”

Jack Schwager first heard of Seykota while interviewing Michael Marcus for his book. After the interview, Marcus told him: “He is not only a great trader; he is a mind.” Schwager rerouted his trip via Reno and drove to Seykota’s house at Lake Tahoe for a two-hour interview that lasted the whole day.

The book, Market Wizards: Interviews with Top Traders, was first published in 1989. Seykota’s chapter is called “Everybody Gets What They Want”. Schwager wrote that Seykota’s achievements must rank him as one of the best traders of our time, although he was then almost unknown to the public. Our guide to the Market Wizards books explains the whole series.

Seykota sits in the book next to other well-known names. The traders include Michael Marcus, Bruce Kovner, Richard Dennis, Paul Tudor Jones, Michael Steinhardt, William O’Neil, Marty Schwartz and Jim Rogers. The trading psychologist Van K. Tharp has his own chapter as well.

One detail from the interview says a lot about his style. There was no quote screen on his desk, not even one. His trading took only the few minutes his computer program needed to produce the signals for the next day, and he got his price data after the close.

The track record: what the numbers really say

The famous return figure comes from Schwager’s introduction to the chapter. As of mid-1988, one of Seykota’s customer accounts, which started with $5,000 in 1972, was up over 250,000% on a cash-on-cash basis. The preface of the book sums it up as a 250,000% return over a sixteen-year period.

Seykota himself only published his “model account”. He described it as an actual customer account that started with $5,000 in 1972 and had made over $15 million. Because money was withdrawn along the way, Schwager noted that the account would theoretically have been up several million percent without withdrawals.

This record cannot be turned into a clean annual return. A cash-on-cash figure with withdrawals is not a compound annual return, and the book gives no annual figures. The often shared infographic that credits Seykota with about 60% per year over 30 years circulates without a primary source, so it is not used here.

Seykota also talked openly about bad years. One of his worst was 1980: the bull markets had ended, but he kept trying to buy back at lower prices while the markets kept breaking. In October 1987, on the other hand, he made money on the day of the crash, for the month and for the year, although he lost on the day after because he was short the interest rate markets.

Start	$5,000 in 1972 (customer account)
As of mid-1988	up over 250,000%, cash-on-cash
Seykota’s own wording	“has made over $15 million”
Without withdrawals	several million percent (theoretical)

Source: Jack D. Schwager, Market Wizards (1989), preface and chapter on Ed Seykota.

Ed Seykota’s trading rules from the interview

When Schwager asked for the rules he lives by, Seykota gave five short points. They sound simple, but each one is about discipline and risk, not about finding the perfect entry signal.

• Cut losses: a losing trade is closed early, not hoped back.
• Ride winners: a profitable trend stays open until the trend changes.
• Keep bets small: no single position should be able to do lasting damage.
• Follow the rules without question: the system decides, not the mood of the day.
• Know when to break the rules: Seykota admits that he sometimes overrides his system or takes a break from the markets.

He stated his risk limit just as plainly. He intended to risk below 5% of equity on a trade, allowing for poor executions, and sometimes lost more when news pushed a thin market through his stops. On another question he said the elements of good trading are cutting losses, cutting losses and cutting losses. How to turn such a limit into a position size is explained in our guides to risk management and position sizing.

He enters with the trend, not against it. If he is bullish, he does not wait for a pullback: his point to buy is above the market, where momentum is strong. He turns bullish the moment his buy stop is hit and stays bullish until his sell stop is hit. This is the logic behind breakout trading as well.

Psychology: everybody gets what they want

The line Schwager found most striking was: “Win or lose, everybody gets what they want out of the market.” Seykota meant it seriously. Some traders, he said, seem to like losing, because losing brings excitement, sympathy or attention.

For Seykota, psychology and trading are the same thing. Psychology is the driver and analysis is the road map, he told Schwager. Even then he worked with other traders on their goals, using methods such as hypnosis, breathing and visualization, and the result was usually either more success or the insight that they did not really want to be traders.

Ed Seykota and the Whipsaw Song

Ed Seykota is not only a trader but also a musician. The music sampler on his website contains orchestral pieces, vocals and band videos. The best known among traders is The Whipsaw Song, which his website dates to 2008 and which he performs with the Trading Tribe band.

A whipsaw is a market in which a sharp move is quickly followed by a sharp reversal. For a trend follower it is the most expensive phase: the system buys a breakout, gets stopped out, then sells the next move down and gets stopped out again. Every trend-following system lives through such phases, and the song is about keeping your discipline through them.

The song runs through the essentials of trend following. You can find it, with sheet music, on the Whipsaw Song page of seykota.com, and the video is on the TradingTribe channel on YouTube. If the words are hard to follow at first, the six essentials below help, because they are the same rules Seykota prints on his Essentials card.

The essentials of trend following

Seykota sums up trend following in six short rules. They appear on his Trading Tribe Essentials card, and trend-following author Michael Covel lists them the same way.

• Ride your winners: hold profitable trades as long as the trend lasts.
• Cut your losses: close losing trades quickly.
• Manage your risk: decide in advance how much of your account a trade may cost.
• Use stops: every position gets a stop loss.
• Stick to the system: follow your trading rules, even after a losing streak.
• File the news: do not let headlines push you out of your system.

The Trading Tribe and seykota.com

The Trading Tribe is Seykota’s network of traders who work on the feelings behind their trading decisions. Members meet in small groups and use the Trading Tribe Process (TTP). The idea, as his website explains it, is that this kind of inner work is almost impossible alone but natural in a group.

Seykota described the method in his book The Trading Tribe, published in 2005. His online store also offers Govopoly, a book about government and free competition, and the Essentials carry card. The website itself warns that TTP is not recommended for people with certain medical conditions and that anyone in therapy should check with their therapist first.

On seykota.com he has answered readers’ questions since 2003. The FAQ archive covers trading systems, risk, psychology and many other topics, and the site also hosts his Trading System Project, price charts and models. The address is seykota.com.

What traders can learn from Ed Seykota

Seykota’s main lesson is that a working system is not enough; the trader has to be able to follow it. He found that out with his own first system and with management at the brokerage house, who turned a winning sugar trade into a loss. Rules only help if they fit your personality.

The second lesson is that risk control comes first. Cutting losses, small bets and stops appear in every list of rules he has given, from the Market Wizards interview to the Essentials card. Writing your own rules down and checking whether you follow them is the purpose of a trading journal as well.

The third lesson is humility about numbers. Seykota’s record is impressive, but it is one documented customer account with withdrawals, not an audited fund history. If you compare his results with other legends in our list of the best traders in the world, look at what each source actually says, and treat round numbers in infographics with caution.

Frequently asked questions about Ed Seykota

Who is Ed Seykota?

Ed Seykota is an American futures trader, born in 1946, who studied at MIT and built one of the first computerized trend-following systems for client money in the early 1970s. He became widely known through his interview in Market Wizards (1989). He later founded the Trading Tribe and runs the website seykota.com.

What is Seykota’s best-known achievement?

His best-known achievement is the record printed in Market Wizards. A customer account that started with $5,000 in 1972 was up over 250,000% on a cash-on-cash basis by mid-1988. Seykota himself said the account had made over $15 million, with money withdrawn along the way.

What trading style does Ed Seykota use?

Seykota is a trend follower. In Market Wizards he described his style as trend following with some pattern recognition and money management algorithms. In order of importance he named the long-term trend, the current chart pattern and a good spot to buy or sell.

Did Ed Seykota write any books?

Yes, Seykota wrote The Trading Tribe, published in 2005. His store also sells Govopoly, and he has answered traders’ questions in the FAQ on his website since 2003. His trading views are best documented in Jack Schwager’s Market Wizards.

How did Seykota influence computerized trading?

Seykota was one of the first traders to test and trade systems by computer. In the early 1970s he tested trend-following rules on an IBM 360 at a brokerage house and then built a system that several hundred agents sold to clients. Schwager calls it the first commercial computerized trading system for client money in futures, which makes Seykota an early pioneer of today’s algorithmic trading and system trading.

What role does psychology play in Seykota’s approach?

For Seykota, psychology is the driver and analysis is the road map. He believes that traders’ results reflect their real priorities, even if they do not admit it. That is why he puts so much work into self-examination and into handling feelings.

What is the Trading Tribe?

The Trading Tribe is a network of small groups of traders founded by Seykota. The groups use the Trading Tribe Process to explore how feelings affect trading decisions. Seykota describes the method in his book The Trading Tribe and on seykota.com.

Does Seykota recommend a specific trading system?

No, Seykota does not sell a ready-made system or a magic formula. His point is that every trader needs a system he is compatible with, built and tested by himself. His general rules are simple: cut losses, ride winners, keep bets small and use stops.

How can traders apply Seykota’s lessons today?

Start with his risk rules, not with his record. Define a maximum risk per trade, place a stop with every entry and follow your rules even after a losing streak. Then test whether the rules suit you, because Seykota’s experience shows that a system you cannot follow is worth little, however good its backtest looks.