Ask Ed Seykota for the three rules of good trading and you get the same rule three times. The joke carries a serious point, and for gold traders it is the most important one there is. This article covers who Seykota is and why cutting losses sits above everything else.
Where he started
Seykota graduated from MIT in 1969 and, around 1970, built one of the first computerised futures trading systems, at a time when most trading decisions were still made by hand. He was later featured in Market Wizards, the collection of interviews with leading traders. His background is technical, but his best known lesson is about behaviour, not technology.
The lesson
His famous answer to the question of what makes good trading: "cutting losses, cutting losses, and cutting losses." Small losses keep you in the game. A trader who exits losing positions quickly can be wrong many times and still carry on. A trader who lets losses run can be right most of the time and still be finished by one trade.
What it means for a gold trader
Gold can move a long way in a short time, which makes a loss that is not cut a serious threat to an account. The practical tool is the stop-loss, set when the trade is opened and not moved further away. Every idea we send includes one. Learning to cut losses properly, and to accept them as normal, is the first skill we work on with new members.
Key takeaways
- Seykota built an early computerised trading system around 1970.
- Good trading: cutting losses, cutting losses, and cutting losses.
- Small losses keep you in the game.
Common questions
What are Ed Seykota's rules of trading?
His famous answer is that the three rules of good trading are cutting losses, cutting losses, and cutting losses.
Why is cutting losses so important in trading?
Because small losses keep you in the game. One large uncut loss can undo many good trades.
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