Ed Seykota: 5 Trading Rules That Actually Work

Ed Seykota is one of the best traders of our time, if not the best.
Although he doesn’t trade currencies or use price action per se, the lessons we can learn from him are just as valuable.
I find this to be true of all successful traders. The market doesn’t make the trader. After all, it’s just the playing field.
What actually allows someone like Ed Seykota to trade on such a scale, and with such tremendous success, are a defined set of technical and mental rules.
I’m about to share those rules with you.
If you are still struggling to achieve consistent profits, this post was written for you. Even if you have found success as a trader, today’s lessons will serve as a refresher.
Read on to learn the five rules Ed Seykota has used to achieve massive success over the years.
Who is Ed Seykota?

Ed Seykota has always kept a low profile. If it weren’t for Jack Schwager’s Market Wizards books, chances are I wouldn’t be writing this post.
He began his trading career in the 1970s, when he was hired by a major brokerage firm. It was there that Ed developed one of the first commercialized trading systems for managing money in the Futures market.
After a few disagreements regarding the way management was interfering with his system, Seykota decided to go out on his own.
So what was his trading performance like in the 1970s and 80s?
As of mid-1988, one of his client accounts—which was started with $5,000 in 1972—was up over 250,000 percent on a cash-on-cash basis.
If we normalize for withdrawals, the account would have been up several million percent.
Those are truly staggering results. Keep in mind that those figures spanned more than a decade of trading, so this was not a fluke or some lucky win streak.
What follows is a rather detailed explanation of Seykota’s five most cherished trading rules.
It includes some of my own interpretations and insights, as well as quotes from the man himself.

Rule #1: Cut Losses

I’m sure you have heard the old adage about cutting losses and letting winners run. It’s been uttered countless times over the years.
But you know what? It’s true.
There’s a reason why Ed Seykota’s first trading rule is to cut losses. It’s because protecting your capital is your primary job as a trader. Making money comes second.
I will add one thing to Ed’s rule, however. Instead of simply saying ‘cut losses’, let’s change it to ‘cut losses early’.
Think about it. Without money, you can’t trade. So if you fail to cut losses early you’ll eventually blow your account.
You do that and it’s game over.
Here’s some advice from Ed Seykota on losing:
Embrace trading losses.
Simple yet so true. To get ahead in this business, you have to learn to lose like a winner.
That means accepting a loss the moment the market invalidates your trade idea.
If you make the mistake of hoping for the market to turn around in your favor, you’ve already lost.
The best way to embrace trading losses is to have a plan. Combine that with small bets and you’ll be lightyears ahead of other Forex traders.
If you can’t take a small loss, sooner or later you will take the mother of all losses.
Anyone who has traded for more than a month can relate to the quote above.
We all have at least one story that involves taking a significant loss. And if you have been trading for years, you likely have several stories to tell. I certainly do.
The takeaway from Ed Seykota’s advice is straightforward. Either learn to handle small losses or risk blowing your entire account. If you can’t do the former, the latter is inevitable.
Losing a position is aggravating, whereas losing your nerve is devastating.
This quote goes hand-in-hand with the last one.
What Ed is saying is that it’s okay to take a loss. Although they’re never pleasant, losses are part of the business.
What is never okay is losing your nerve.
The best way to ensure you never lose your nerve is to cut losses early. It’s one of the simplest ways to maintain your discipline and avoid emotional decision-making.