Excepts

from Ed Seykotas FAQs

Traders and Surfers both have to deal with feelings of missing out on the small ones, until the
big one comes along. They also have to deal with feelings of staying with the big one.
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Sometimes markets trend smoothly. Other times they chop. A long-term trend following system
provides direction for all types of markets. The basic Trend Trading rules are:
Trade with the Trend
Cut Losses and Ride Winners
Manage Risk
The definition of Trend is specific to individual traders.
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Trend followers trade at new highs and at new lows.
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Yes. At the moment two markets simultaneously hit buy stops, they correlate tightly,
particularly in the very short term. To diversify, include an instrument that breaks out while
others sleep. For example, take stocks from different sectors or commodities from different
groups. Silver and soybeans might break out the same day and thus correlate well in the very
short term. A portfolio of silver and soybeans provides more diversification that a portfolio of
silver and, say, more silver. The opposite of diversification is plunging, betting it all on one
horse.
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As with all markets, to get a good piece of the major move, you may have to ride out some
corrections.
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In actual trading, even with stops, you cannot predict your exact risk. In actual trading, you
might consider taking small independent positions, each with a % risk to stop, up to a total of
25%. With this plan, your winners and losers tend to average out so you get the same overall
gain with a smoother ride (less volatility).
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In Trading diversification might even mean getting bearish and picking out some good shorts.

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Very short term systems tend to succumb to transaction costs.
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The complexity of a trading system has little to do with the markets and little to do with the
math; it has mostly to do with your emotions.
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Your terms: volume trends; likelihood; trend continuance are all ambiguous, fuzzy notions. They
have little to do with trend following except to provide excuses for missing signals. Trend
followers take their signals and leave distractions to fuzzy-mentalists.
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Transaction costs, such as commissions and slippage, become increasingly severe with
increasing trading frequency. To minimize these effects, use longer term (slower) systems. In
trading, slow and steady profits beats fast and choppy whip-saws. Acting like a Snail might be
the fastest way.
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During trending markets, trend followers tend to wax strong and confident; they follow
breakouts with enthusiasm and vigor. This tends to precipitate choppy markets and strings of
false breakouts that tend to discourage trend followers. The percentage of money on trend
following methods tends to seek its own optimal value. Choppy Waters tend to discourage all
but the most stalwart sailors.
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A system comprising 3 to 4 subsystems is a single system.
A system exists as long as someone follows it. People have a life span and tend to lose
effectiveness near the end.
Trend Following acknowledges the principle of Momentum; as long as momentum exists, there
is a place for trend following.
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The big, major-mover, long-term multi-fold trends tend to occur on the long side although
riding them can have complications.
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Traders may find that the majority of their trading activities are basically ritualistic in nature
and actually contribute little to the process of trading successfully. Meanwhile, a few activities,
many of them subtle and unconscious, dominate the trading.
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A fish does not see the water and you do not see your own drama.
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We live in a continually evolving, self computing moment of now. We have no access to the
future or the past. Our notions of future and past all reside in the now, along with everything
else. Time is a notion that connects two non-existing positions. Belief in time allows people to
avoid taking responsibility, and enables derivative myths such as causality, guilt and blame that
provide bases for organizing society. As a society matures and control centralizes, these myths
become increasingly important control tools. Children who show signs of resisting the cultural
myths by displaying anxiety typically receive attitudinal adjustors such as Ritalin. People
who live in the myth commonly speak of time as a substance. They save it, make it last forever,
bottle it up, spend it, go through it, share it, take it up and waste it.
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The market is trending to a new level, now, only now and always now. A trend is a general
direction in which something moves. To define a trend, pick a historical price, and subtract it
from the current price. The difference tells you the direction and magnitude of the trend. A
market has no inherent trend. It only has a price, now. A trend is a notion you bring to the
market, depending on your own definition of trend.
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As you experiment and test various systems and as you work to free your self from drama,
your trading system and you as a trader tend to converge toward something that works.
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You cant steer a car by placing your hands on the rear view mirror and twisting it around. You
cant deal with your fear of whipsaws by tinkering with your computer system. You might try
taking your feelings of fear and frustration to a Tribe meeting where you can experience them.
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Frustration can intend various positive results. You can find the ones particular to you with TTP.
Frustration A cousin of risk control.

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Jumping to logical conclusions about the causes for problems might be a clever way to avoid
experiencing forms you dont want to experience. Logic can be a detour around experiencing
forms.
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The storm destroys the other shrimp boats, so Forrest Gump and the Captain gain an edge
after the storm. Similarly, choppy markets discourage many trend followers and set the stage
for the surviving trend followers to enjoy smooth trending markets. One Way to Harvest Shrimp
is to put up your boat, take a vacation, sit in a nice restaurant, enjoy a shrimp cocktail and wait
for calm seas to return.
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I trade stock indices according to their trends. I trade individual stocks according to their trends.
Sometimes they trend together and sometimes they dont.
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The difference between various optimizations of your system is likely much less than the
difference between sticking to it and not sticking to it and thats where TTP comes in.
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When your mission becomes about serving others by managing their money, rather than about
avoiding experiencing poverty by hitting on rich people, you might become attractive to serious
investors.
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The principles of Trend Trading:
trade with the trend
ride winners
cut losers
manage your risk
You might also add: when strong feelings come up that prevent you from sticking to your
system, experience them. A mechanical system can help increase your consistency, the number
of items you can track, and your adherence to the principles.
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Fred wants you to experience your feelings. If you are willing to do so, Fred has no desire to
control you. To the extent you are unwilling, Fred finds ways to deliver the feeling to you by
setting up dramas. An ambiguous trading system of any type provides room for Fred to set up
drama for you in your trading. Strict trend followers, with very precise systems, often have
trouble sticking with their discipline. Strong feelings come up that make them jump their
systems. If they learn to experience these feelings, the feelings dissolve into AHAs. This makes
it easier to stick to a system.
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The study demonstrates that stocks that look similar on a 100 day chart may look very different
on a longer chart. There are many ways to define strong and the definition you use can make a
big difference.
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Defining a System Clarifies it and dissolves questions about what it is and how it works and
converts its application from drama to right livelihood.
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The theme of the Workshop is Defining Your System. You might see if you can define the
specific properties of stocks that look weak to you. Then, you might also define the specific
action you take in response to a weak-looking stock. Absent specific methodology, Fred tends
to hijack your trading to help you experience feelings you are otherwise unwilling to feel. How
Things Look is Largely up to Fred.
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You pose an interesting question. If two charts have identical intermediate-term strength and
are also in new-high ground for several years, would you be inclined to buy the one in all-time
high ground or one that still below all-time highs. Keep an eye on the Charts page for some
investigations along these lines.
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A Small System properly constructed, can attract and hold large assets.
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Computing the probability of a stock rising (in the future) is inconsistent with trend following.
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You might notice the extent to which you validate a trading system by the daily percentage
change in a few stocks. Other methods of measuring success include noticing how well you
follow your signals, ride your winners, cut losses and manage risk.
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Rule of thumb for passive trend following systems allow about 50% of your expected annual
profit for drawdowns so if you want 1,500% per year, you might allow for 750% drawdowns.
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Trader Job #1: Manage the Risk
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Under Fred helps us get what we want whether we like it or not. The feelings we are unwilling
to experience are our real trading system. When you receive Fred, and experience your
feelings, you may get an AHA, and know what you want to do and how to do it. TTP intends to
assist Fred and CM to communicate about feelings. Out of this alchemy, you might receive an
AHA, or enhance the intuition you report. Defining your system consciously, committing to stick
to it, and accepting the feelings that come up allows you to transcend your own machine-like
subconscious behavior.
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A Fish at One with the Water sees nothing between himself and his prey A trader at one with
his feelings feels nothing between himself and executing his method.
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Commitment, includes intention and agreement with others. Commitment aligns CMs on the
logical plan level, and aligns Freds on the Under Fred Network. Commitment is the power to
realize that intention = result.
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My experience is that about 20% of the activities you perform as a trader contribute about 80%
of your profit and that the other 80% of the things you do, have, at best, no effect.
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The trend is your friend except at the ends where it bends. Astute Cyclists dont try to tell the
path where it should go.

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You not only seem to want the perfect trading system, you seem to want it to appear as a
definite set of rules. Typically, sets of trading rules, such as you find in books and on internet
sites are ambiguous, even internally conflicting. Even if you could find a set of rules that you can
compile into code, your program would likely guide only a sub-set of your actual trading
process. For example, essential trading tasks include selecting the markets to put on the
system, determining the overall and individual portfolio risk, selling instruments to make room
for more promising ones, picking points at which to roll contracts and at which to enter a new
customer, etc If you notice feelings of desire for the Holy Grail or feelings of wanting
someone else to take responsibility for your actions, you might take these into TTP. For
example, you might take the feelings you have in your stomach into TTP as a starting point.
Your Actual Trading System is the set of feelings you are unwilling to experience.
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Most markets have both trending and sideways periods.
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When you are willing to experience boredom, it passes through. When you are unwilling to
experience boredom, Fred finds ways to make your life interesting.
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If the trend is already in progress, one way to get on board is to enter a stop order just outside
the recent trading range. If a trend is not currently in process, you can enter a stop order
outside the long-term trading range.
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Trend Followers buy on penetration of resistance, sell on penetration of support and ignore
targets.
This post has special permission to reprint from ED SEYKOTA for more please visit EDs site
http://www.seykota.com