FAMOUS STRATEGIES

Systematic Trend Following

Ed Seykota · 1970s onward. Computerised trend systems traded across many markets, with strict loss cutting and a strong emphasis on the trader’s own psychology and discipline.

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Classification: philosophy and principles. Philosophy: Seykota is known for principles (follow the trend, cut losses, manage your own psychology), not for one published rule set, so this page describes the general trend-following approach, not a copy of his system. The entry, exit and stop-loss sections below are interpretive guidelines drawn from the trader’s public principles, not a rigid published rulebook.
ORIGIN

Where it comes from

Ed Seykota, an MIT-trained engineer, was among the earliest traders to build computerised trend-following systems, beginning in the 1970s. He is profiled in Jack Schwager's Market Wizards (1989) and is also known for his writing on trading psychology. His name is attached to the general idea of systematic trend following: define rules in advance, trade many markets, cut losses and let profits run.

Core principles

Follow trends and do not try to predict tops or bottoms.
Cut losses and let profits run.
Manage risk on every position.
Diversify across many markets.
Master your own psychology, because most failures are behavioural.
Use tested rules instead of moment-to-moment opinion.
AT A GLANCE
PHILOSOPHY

Ed Seykota

1970s onward

A set of broad principles rather than a single published system. Two people can apply it differently, so define your own written version before testing.

Cut losses, ride trends
HOW IT WORKS

The method in plain terms.

An interpretation of public principles, not an official rulebook.

A trend-following system is a set of rules that identifies an established trend (for example a moving-average signal or a breakout of a range), takes a position in its direction, and stays in until an opposing signal or a trailing stop ends the trade.

Because trends are rare and losses are frequent, trend followers trade many markets and accept a low win rate. A small number of large winners drives the results.

Seykota-style thinking adds an emphasis on the trader: taking losses without hesitation, sizing risk sensibly and recognising how fear and hope distort decisions.

ENTRY

Entry guidelines

Define the trend signal in writing, for example a breakout of a chosen lookback high or low, or a moving-average crossover. The specific choice is yours to test.
Trade only in the direction of the signal, long or short.
Decide position size from risk, not from conviction.
Take every signal your rules generate and do not cherry-pick.
Spread risk across several unrelated markets.
EXIT

Exit guidelines

Exit on an opposite signal or on a trailing exit level defined in advance.
Let profitable trades run without a fixed profit target.
Exit immediately when the stop is hit, without waiting for a bounce.
PROTECTION

Stop-loss guidelines

Set the initial stop at entry, at a distance that reflects the market's normal volatility.
Trail the stop with the trend using a fixed rule, for example a volatility multiple or an N-period low.
Cut losses without exception. The stop defines the maximum risk and is never loosened.
RISK

Risk management

Risk a small, fixed fraction of equity per trade. Many trend followers are often described as using roughly 1–2% or less per idea.
Cap total open risk and correlated exposure.
Reduce size during drawdowns and increase it only as equity grows.
Expect long, uncomfortable drawdowns and flat periods. Decide in advance at what drawdown you will review the system, and do not simply abandon it.
WORKED EXAMPLES

One that worked, one that failed.

Both charts are schematic drawings of the idea. They are illustrative scenarios, not recorded trades or real market data.

SUCCESSFUL EXAMPLE

Illustrative winner: a long trend with a trailing exit

Illustrative winner: a long trend with a trailing exit: schematic price line with entry, exit and stop markers. Not real market data.StopEntryExitEntry: trend signal firesExit: trailing stop hitStop: volatility-basedSchematic only. Not real market data.

A market breaks out of a long range and trends for months, and the trader holds through shallow pullbacks.

Entry
Enter on a break of the chosen lookback high, with risk-based position size.
Exit
The trailing exit is hit after the trend matures, giving back part of the gain.
Stop-loss
The initial stop is a volatility-based distance and is trailed upward.
Lesson
Cutting losses fast is what makes it possible to hold winners through the noise.
FAILED EXAMPLE

Illustrative loser: a whipsaw in a sideways market

Illustrative loser: a whipsaw in a sideways market: schematic price line with entry, exit and stop markers. Not real market data.StopEntryExitEntry: trend signal firesExit: stopped outStop: volatility-basedSchematic only. Not real market data.

The signal fires in a choppy market, price reverses and the position is stopped. The sequence may repeat several times.

Entry
Enter on the trend signal.
Exit
Stopped out with a small, pre-defined loss.
Stop-loss
The volatility-based stop limits each attempt to a small fraction of equity.
Lesson
A string of small losses is the price of admission; skipping signals afterwards destroys the edge.
WHEN IT FITS

Suitable market conditions

Markets that produce sustained directional moves.
A broad basket of markets such as interest rates, currencies, commodities and indices.
Traders who can accept drawdowns and hold positions for weeks or months.
WHERE IT STRUGGLES

Limitations

Whipsaws and low win rates test discipline.
Large open profits are often partly given back before the exit signal fires.
No single "Seykota system" is published, so you must build and test your own parameters.
Performance can be poor for long stretches when markets are range-bound.
Diversifying across many markets needs capital and access.
AVOID

Common mistakes

Overriding signals after a few losses.
Over-optimising parameters on past data.
Trading too few markets.
Risking so much per trade that a normal losing streak becomes unbearable.
Taking profits early because a gain feels fragile.
PRACTICE

Practice checklist

☐ Write the signal, exit and sizing rules on one page.
☐ Test them on data you did not use to design the rules, and record the worst drawdown.
☐ Paper trade, or trade a very small size, for at least three months.
☐ Journal each trade's emotions against the rules you followed.
☐ Track the percentage of signals actually taken.

Frequently asked questions

Is there a Seykota system I can copy?
Not as a single published rulebook. His principles and interviews are public, but the specifics of his systems are not. Treat this page as a general trend-following guide.
What win rate should I expect?
Often below 50%. Trend followers rely on the size of winners relative to losers, not on the frequency of wins. Your own tested rules define your expectations.
Is trend following the same as momentum investing?
They are related but different. Trend following times entries and exits on a single market's own trend, usually with stops, while momentum investing typically ranks assets against each other.
SOURCES

Where to read more.

Plain-text references for further reading. Check specifics against the original material before relying on them.

Jack Schwager — Market Wizards (1989), interview with Ed Seykota
Michael Covel — Trend Following (first published 2004)
Ed Seykota's own published essays on trading and psychology (personal website)
Educational reference only. TCT does not teach, sell or recommend this strategy. Descriptions are summaries of publicly known approaches, the examples are illustrative, and past performance of any trader or system does not indicate future results. Trading involves risk of loss.