Ed Seykota: 5 Trading Rules That Actually Work: Rule 2

Rule #2: Ride Winners

Want to know how to become consistently profitable?
It’s actually quite simple.
Cut losses and ride winners. That’s according to Ed Seykota and just about every profitable trader I have ever talked to or studied.
There’s a reason why I recommend a favorable risk to reward ratio. It’s because your winners have to pay for your losers.
You see, trading isn’t about having a win rate of 70% or 80%. It comes down to how much you make when you’re right and how much you lose when you’re wrong.
That’s the only thing that matters. Everything else is trivial.
Allow me to expand on this idea for a moment.
Each one of the names listed below is a multi-millionaire (or billionaire) trader or investor.
• Bill Lipschutz
• Paul Tudor Jones
• Ray Dalio
• Warren Buffet
• Carl Icahn
I’m sure you have heard these names at least once in your lifetime. Most likely they have come up over and over again in your search for consistent profits.
No two market players above are the same. They each have a unique style and differing opinions about the markets, technicals vs. fundamentals, and even risk management.
However, they all share one incredibly important rule. Can you guess what it is?
They all require an asymmetrical risk to reward ratio. That’s a fancy way of saying that the rewards must vastly outweigh the risks.
The only way to achieve asymmetrical returns is to ride your winners.
It’s great to know that you have to ride your winning trades. But how exactly can you do that?
Knowing you should do something is one thing. Knowing how and having the discipline to see it through is another matter entirely.

Here are a few of my favorite ways to let profits run:

1. Use an end-of-day approach
   There’s more than one reason why I favor the daily time frame. We often talk about the greater reliability of daily signals, but there is another equally important reason.
   Market trends are vastly easier to identify on the daily chart. They offer a “big picture” view that isn’t available on a 5-minute or even 30-minute chart.
   From the daily, I can see where the market has been this year. Using that information, I can quickly determine where the market is likely to go as long as there’s a discernible pattern or trend.
   Another advantage to using the daily time frame is that it forces you to stay patient.
   If you only need to check your charts once per day, you’re far less likely to exit a trade prematurely. This gives you the ability to ride a trend even if there is some intraday volatility. As Seykota says,
   Having a quote machine is like having a slot machine on your desk—you end up feeding it all day long. I get my price data after the close each day.
   Yes, the daily chart will be slower than a 5-minute chart. Much slower in fact. But that’s a good thing if you’re interested in letting your winners run.

2. Identify what’s really happening
   It’s far too easy to get caught up in trading strategies, risk management and other various aspects of trading.
   However, the best traders see the market in a different light.
   Instead of just looking for buy and sell signals, these traders understand that there’s something much bigger at play.
   Every market tells a story. Look at a EURUSD chart, there’s a story behind the price action. The same goes for the GBPUSD, AUDUSD or any other currency pair.
   Most traders are so focused on finding buy and sell signals that they ignore the story altogether. What they don’t realize is that the story, which is formed by a market’s highs and lows, is the key to letting profits run.
   Once you’re able to see what’s really happening via the trends and patterns on your chart, it’s simply a matter of positioning.
   In order to ride your winning trades, you need to position yourself with the momentum. That’s where the smart money is and it’s where the largest profits are made.

3. Walk away
   Apart from the technical factors we just discussed, your ability to walk away from your trading computer is the single most important piece of the puzzle.
   It’s no secret that most retail traders hover over their open position.
   We also know that most retail traders (over 90%, according to most sources), fail to earn consistent profits.
   Is that a coincidence? I doubt it.
   In order to ride your winning trades, you must be able to walk away. This is especially true if you’re using the daily time frame.
   Give the market some room to breathe. You won’t be able to ride your winning trades if you aren’t giving the market enough space and time to see a trend through to completion.