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Ed Seykota’s Magic Trading System

1: Do not stress about whipsaws – one good trend pays for them all.

A whipsaw is when you enter a stock, but get stopped out quickly.  In a period of whipsaws, this may happen many times.  This can be frustrating to a trader or investor, and it may cause them to change their system.  But the fact is that one good trend will pay for all of these whipsaws, and if you change your system you lose the benefit of that!

2: When you Catch a Trend, ride it to the end.

Your system must be able to jump on a trending stock (for instance, up if you are going long), but then also be able to ride that trend to the end.  Many novice traders will jump out of stocks before they are finished trending because they are scared the market has gone too far.  Let your system tell you when the trend is ending, and only exit once it does.

3: When you show a loss, give the loss a toss.

Every single successful money manager ever interviewed has said something along the lines of: “Cut your losses short”.  Get rid of your losses.  Keep your winners.  And once you have your system don’t second guess it!  Being stopped out is part of the process.

4: We know if our risk is right when we make a lot of money, but can still sleep at night.

Risk is the amount of risk per trade (the price between your entry and your stop loss), and how much your total risk is (regarding how many positions you have open at one time). (more…)

Is your Trading Fragile? Robust? or Anti-Fragile

Fragile- “Easily broken, shattered, or damaged; delicate; brittle; frail.”

Robust- “Strong and healthy; hardy; vigorous.”

Anti-Fragile- “A postulated antithesis to fragility where high-impact events or shocks can be beneficial. Anti-fragility is a concept developed by professor, former trader and former hedge fund manager Nassim Nicholas Taleb. Taleb coined the term “anti-fragility” because he thought the existing words used to describe the opposite of “fragility,” such as “robustness,” were inaccurate. Anti-fragility goes beyond robustness; it means that something does not merely withstand a shock but actually improves because of it.”