Paul Tudor Jones

Paul Tudor Jones is an American Trader founder of Tudor Investment Corporation. Paul Tudor long-term annual returns are close to 19.5%. Here are some important rules by this notorious trader.

 

MORE: ◙ Hedge Funds Market Wizards 2012 | ◙ New Market Wizards 1993 | ◙ Market Wizards 1989

 

■ I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.

One principle for sure would be: get out of anything that falls below the 200-day moving average.

■ When you are trading size, you have to get out when the market lets you out, not when you want to get out.

■ First of all, never play macho man with the market. Second, never overtrade.

Don't ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don't have control.

Don't be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day.

■ Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don't be a hero. Don't have an ego. Always question yourself and your ability.

When I trade, I don't just use a price stop, I also use a time stop. If I think a market should break, and it doesn't, I will often get out even if I am not losing any money.

When we came in on Monday, October 19, we knew that the market was going to crash that day. As the previous Friday was a record volume day on the downside. The exact same thing happened in 1929, two days before the crash.

■ Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build.

■ The first is, you always want to be with whatever the predominant trend is. My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”

The sweet spot is when you find something with a compelling valuation that is also just beginning to move up. That’s every investor’s dream.

I’m looking for 5:1 Risk / Reward ratio. Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.

■ My contrarian trading was based on the fact that the markets move sideways about 85 percent of the time. But markets trend 15 percent of the time and you need to follow the trend during those times.

■ I love trading macro. If trading is like chess, then macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade.

■ I am always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have. At the end of the day, the most important thing is how good are you at risk control.

I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket – that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward-risk opportunities that should give you minimum draw down pain and maximum upside opportunities.

Only bet when the odds are substantially in your favor. Don’t bet unless you have a margin of safety.

I think one of my strengths is that I view anything that has happened up to the present point in time as history. I really don’t care about the mistake I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market.

By watching my first boss and mentor, I learned that even though markets look their very best when they are setting new highs, that is often the best time to sell. He instilled in me the idea that, to some extent, to be a good trader, you have to be a contrarian.

You can’t perform the market if you are doing just the same things as the market is a mathematical fact. You must sometimes be a contrarian and sometimes be right about that view in a way that makes the magnitude of what you do right outperform the crowd.

My guiding philosophy is playing great defense. Always maintain your sense of confidence, but keep it in check. Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.

Advisors with skin in the game perform better and are more accountable. What is good for the advisor or manager is good for you which lowers conflicts of interest.

I’ve done really well on the short side. There’s nothing more exciting than a bear market. But it’s not a wonderful way to long-term health and happiness. I spent 20 years doing it, it’s not the right way to make a living trading. It’s simply not.

The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.

 

 

Paul Tudor Jones

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