Paul Tudor Jones is without question one of the greatest traders of all time.
He began trading the markets way back in the 70s under the famous cotton trader Eli Tulis.
Since then he has gone on to build a 4.6 billion dollar fortune from trading with at least 100 million dollars of that coming from the 1987 market crash he successfully managed to predict.
Today his own hedge fund manages 17.5 billion for clients all over the world and trades in a variety of financial markets using global macro, quantitative global macro and quantitative equity market neutral trading strategies.
He has managed to achieve so much in trading that I think it would be beneficial if we try to learn as much as we possibly can from him. Although we can’t learn the specifics of the trading methods he uses, we can get some idea of the way he trades by analyzing some of the many quotes Paul Tudor Jones has said over the years.
I’ve picked what I think are the best and most relevant quotes Paul has said about trading and given a small translation as to what they mean for you in your trading.
“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.”
What Paul is saying here is an almost direct attack on what trend traders commonly say.
He’s saying that, instead of jumping into on a trend after it has already begun it’s a better idea to attempt to gauge when its going to end.
If your read the book Market Wizards in which Paul Tudor Jones is one of the traders interviewed, he says that when trying to pick a top or bottom in the market he’ll keep entering trades until the actually find the top or bottom.
In other words he’ll come up with an idea as to why the market should be turning at this point then he’ll enter trades in the direction he thinks the market is going to go, even if he’s expecting the market to move up and it continues to move down he’ll keep placing buy trades until he learns of something happening in the market which changes his overall idea of why the trend should change in the first place.
“[I’m looking for] 5:1 (risk /reward). 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.”
This quote highlights how important it is to properly understand risk reward ratio when trading.
Paul Tudor Jones knows he doesn’t have to win on very trade he makes in order to make significant trading profits so long as he retains a good risk reward ratio on each trade.
In this example he’s saying how by have a minimum risk reward ratio of 5:1 he only has to win on 20% of his trades to make money, he can lose on 80% of his trades and still remain in profit, this is an easily achievable target for retail traders.
If you’ve spent any length of time researching candlestick patterns you’ll know it’s commonly said they have 50% chance of resulting in a profitable trade, in the quote Paul Tudor Jones is saying you do not even need to achieve that to be successful.
“Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.”
This quote has more to do with trading psychology than it does for trading strategies.
Many traders never feel as though they are in control, they feel like the market is the entity that is in control and to a some extent they are right, but in another way their wrong.
Although there are a lot of things traders cannot control in the market, there are things which they can control, how much you can potentially lose is something which is under your control as is when to enter and exit trades.
Which is what Paul means when he says “first and foremost protecting your butt”, taking care of how much you can lose on a trade is the number one thing which is under your control when trading.
Never wishing is something which is very difficult to do in trading , this is something which even I have trouble with.
Dwelling on past mistakes like winning trades you let turn into losers is a problem encountered by professional and retail traders on an almost daily basis, its easy to look back and think “if I had just done this I would have made this” this mindset is not productive for your trading, in fact, it actually leads you to make more mistakes.
The best way to combat this problem is to treat every day as if it was your first time trading and only focus on things that you’ve done which are positive.
If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.”
The point of this quote is very simple, do not let a losing trade get out of hand.
If you find yourself in a losing trade which is making you feel scared or uncomfortable its best to close the trade and wait for the next opportunity to present itself.
In my article on using stop losses I show you a worst case scenario of what can potentially happen if you fail to get out of a trade which is making you uncomfortable, a small loss soon turns into a large loss and the level of fear you will feel means your prone to falling into an incredibly costly psychological trap which could result in you losing all the money in your account.
The message is simple: “If in doubt get out”
“By watching [my first boss and mentor] Eli [Tullis], 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 to me the idea that, to some extent, to be a good trader, you have to be a contrarian.”
This quote see’s Paul talking about one of the ideas his mentor taught to him when he was starting out.
To be a contrarian means to do things the opposite way to how everyone else is doing them, when people see a market making new highs they usually tend to think its good idea to buy, but the reality is it’s probably a much better idea to sell because if everyone’s buying it means all the other traders who are contrarian are likely to start selling too, and since these are usually the most profitable set of traders it makes sense to follow what.
I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.
This one is self-explanatory. don’t place trades when big news events are due to come out.
It is extremely risky placing trades before key news events come out due to the unpredictability they bring to the market, nobody can predict what these events are going to be nor can they predict the impact the are going to have on the market, for this reason its essential you refrain from placing any trades immediately before news events are released.
“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.”
This is similar to what I was saying earlier.
Most traders get caught up in their past mistakes, this could be anything like losing trades you made or trades you saw but didn’t take for whatever reason, which if you would’ve taken, would have resulted in you making money.
If you get caught up on previous mistakes what happens is you begin to relate those situations to the current situation you’re in now, in other words, if you have lost on your previous trade and the market begins to go against you on the current trade you’re in, you’re going to remember the previous trade you lost on and start worrying in your mind that the trade you’re in is going result in the same outcome as the last trade.
This will influence the actions and choices you are likely to make in regards to your current trade, you may choose to close the trade early out of fear of losing money, even though the outcome of the previous trade has no bearing on the outcome of you current trade.
“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.”
Every true trader who has learned how to trade profitably has reached this level due to them always wanting to learn more about the market, there should never be a point where you think you have figured everything out.
There have been times when I’ve come across trading strategies and thought “wow this is it”
“This is the way to make all the money !”
Every single time I’ve thought this I always ended up being humbled by the market, this has happened enough times for me to realize that I will probably never know everything there is to know about the market, which is fine because I don’t need to understand everything that’s going on in order to make money.
Ariane Wetherby says
Thanks a lot. This is great content. I might share some for you guys too. Great work poster!