John Paulson may not be as well know as some of the other traders you have read about in books but he remains one of the biggest traders operating in financial markets today.
Like George Soros Paul became famous for making a huge amount of profit in a small duration of time.
The trades he placed betting on the sub prime mortgagee crisis which was the eventual precursor to the 2008 financial crisis made him and his investors a total of 15 billion ! This massive profit has gone down is history as the greatest trade of all time and took Paul from a relatively unknown hedge fund manager to one of the most famous traders on the planet.
John’s massive success means its worth taking a look into some of his quotes to see what lessons we can learn for our own trading. I’ve read Paul doesn’t like doing interviews so he hasn’t actually said many quotes over the years but the ones he has given are very important for trading today’s markets which makes them essential reading for any budding forex trader.
No Strategy Is Correct All Of The Time
Pretty self-explanatory this one.
It may come as a slight blow to you to know no strategy exists which is going to enable you to win on every trade you place. Some retail traders think if they learn enough about the markets they’ll eventually reach a point where all the trades they take will be winners.
People don’t understand a strategy which is correct all the time doesn’t necessarily translate into making large sums of money, your ratio of winning to losing trades is one of the least important statistics you need to be following in your trading, people want to win on every trade because they hate losing, but even if you had a method which always provided you with winning trades it doesn’t mean that method is going to allow you to make a lot of money.
No mater how much you learn about the market you will never reach a point where each trade you place turns out to be a winner.
Fear-driven periods in the past have been used as buying opportunities for savvy investors
When John says fear driven periods he means times when the market is very bearish and the economic outlook is grim.
One such time was when the markets crashed back in 2008.
Soon after the crash many people in the media were saying how the economy is terrible and things are never going to improve, with all these trusted outlets saying how bad things are it makes people who hold investments in the markets sell whilst also making people scared to buy because they think the economy is really bad and its never going to get any better.
In my article “the most profitable trading strategy in existence” I talk about how some of the best opportunities to make money come from when financial markets crash. When markets crash no one wants to buy for the reasons outlined above, but if you analyze all the crashes which have occurred throughout history you’ll see in the end markets always recover and within a few years will be trading at new highs, similar to what we have seen now with the Dow Jones index.
Many investors make the mistake of buying high and selling low while the exact opposite is the right strategy to outperform over the long term.
Buying high and selling low is a piece of advice which originates from trend trading.
The whole premise of trend trading is the idea that if the market has been moving in the same direction for a long duration of time its likely to continue moving in the same direction in the future, therefore buying after the price has been rising for a long time is a good strategy because the odds are its going to continue rising in the future.
The traders who do this are essentially buying high, they think this is a good strategy as they believe in the premise of trend trading, what John is saying though, is over the long-term a strategy like this will not be able to outperform the market.
Instead he says you need to be doing things the other way around i.e buying low and selling high, if you can do this then you’re in with a chance of out performing the market over the long-term.
Our goal is not to outperform all the time – that’s not possible. We want to outperform over time.
The goal of many forex traders is to make money from the markets every day, for the most part this is impossible.
John is saying how the focus should be on making money over a span of years rather than days which is what most traders primarily focus on.
If you go into the markets with the expectation you need to be making money each day then you will be putting yourself under intense pressure to perform. This pressure will only lead to failed trades and frustration. Putting unrealistic expectation on your trading ability will only damage your trading performance.
The closer your expectations are to the reality of the markets the better it will be for your trading.
You can’t think about the past. You have to think about the future.
Relating past situations and mistakes to your current or future situation is something which will hold your trading back from being as good as it can be.
If you keep thinking about past trades which didn’t work out as expected then when an opportunity appears on your charts you may hesitate in taking the trade because of what happened before, even though the current trade is completely different from the past trade you’ll still feel like there is some sort of connection between the two and that taking this current trade is going to result in you losing money like you did on a trade in the past.
You must treat each trading day as if were your first time trading the markets, every trade you take is different from the last, there is no similarities, even if your taking a trade using the same rules or strategy as you have before it makes no difference, very single trade you place is completely independent to any previous trade you have placed in the past.
We’re not going to play a winning hand every day
John is highlighting the important of not expecting to have winning trades each day.
He knows there will be days when he wont make money and he accepts this as being a fact of the market. Overall retail traders do not do this, they go into the each trading day with the expectation they are going to make money and have winning trades.
By expecting this to happen they can lead themselves to take silly trades which are not part of their trading plan, if they think they can have a winning trades each day then they will actively seek out the trades which they believe are going to be winners and in the process end up taking trades which cause them to lose money because their mind is focused on finding the winner, not following their trading plan which should be their main priority.
What makes the quotes from John Paulson so important is they come from a trader who has made most of his money in the past 15 years.
There are many books out there which have been written by traders or are about traders which have quotes contained in them that are not relevant anymore, these traders were active many years ago and the advice they give was based on how the markets were back then, nowadays financial markets are far different to what they were many years ago which means the advice given by the traders back then as to what you should do when trading the markets is not suitable for trading today’s markets.
Thanks for reading, if you have any questions please leave them in the comment section.