Living With Ed Seykota | Open Interest | Ep.19 BONUS

Episode Overview

• An exploration of legendary trader Ed Seykota's high-risk trading philosophy through the eyes of his former apprentice, Dave Druz.
• A deep dive into the concept of "optimal bet sizing," its theoretical basis, and its practical limitations in real-world trading.
• Personal anecdotes from Druz's time with Seykota, highlighting the immense psychological fortitude required to trade at the highest levels.
• Key lessons learned from Seykota on the importance of authenticity, avoiding self-imposed limits, and maintaining personal integrity.

Key Concepts

• The Psychology of Optimal Returns: Achieving maximum returns requires pushing bet sizes to a level of "heat" or discomfort that most traders cannot psychologically tolerate, creating a high risk of ruin if not managed perfectly.
• Authenticity in Trading: Attempting to directly emulate another trader's style, particularly someone with an extreme personality like Ed Seykota, is a recipe for failure. A trader must operate in a way that is true to their own nature.
• The Limits of Optimal Bet Sizing: While a mathematically optimal bet size exists for a system with a known, stable edge, this concept is difficult to apply in practice because a trading system's edge constantly varies.
• Emotional Detachment: A key trait of elite traders like Seykota is the ability to completely detach from the outcomes of past trades, treating every day as a new opportunity without emotional baggage from prior losses or wins.
• Self-Imposed Limitations: A major barrier to success can be the artificial limits one places on themselves. Seykota taught lessons designed to break these mental constraints.

Quotes

• At 0:34 - "it's like he knows if you want to get the optimal return, you have to push that bet size, and the heat has to be high, and most people can't do it." - Druz explains the high-risk, high-reward philosophy of the legendary trader he studied.
• At 16:31 - "Because I so messed up myself by pretending I'm somebody I'm not... I pretended I was Ed for a year. I couldn't do it." - Dave Druz reflects on his failed attempt to adopt Ed Seykota's trading personality, highlighting the importance of authenticity.
• At 18:41 - "Well... I don't think I've lost more than 50%... in a day." - Recounting Ed Seykota's answer when asked about his biggest drawdown, illustrating Seykota's incredible risk tolerance.
• At 20:47 - "Ed was absolutely flawless, flawless. He had no, like no memory of what happened. It was like every day was new and every day was do the right thing." - Druz describes Ed Seykota’s exceptional psychological ability to detach from past losses.
• At 30:33 - "'Oh... you trade a little bit like I do. Why don't you come out here and be my apprentice?'" - Druz quoting Ed Seykota's unexpected offer, which began his unique learning experience.
• At 39:24 - "Don't limit yourself and always keep your word." - The two key lessons Druz learned from a memorable story involving Seykota and an entire aisle of cookies at a grocery store.

Takeaways

• Find and develop a trading style that aligns with your own personality and risk tolerance rather than trying to copy someone else's.
• To achieve top-tier returns, you must be prepared to endure significant psychological pressure and the potential for large drawdowns.
• Cultivate emotional discipline to separate your decision-making from the results of previous trades, preventing past losses from influencing future actions.
• Actively identify and challenge your self-limiting beliefs, as they can be the biggest obstacle to achieving your full potential.