Paul Tudor Jones-Top lessons you should learn from this trading legend.
Paul Tudor Jones is one the biggest hedge fund manager on wall street and known for his 1887 market crash prediction. Let’s begin with his past and how he entered in hedge fund business after multiple ups and downs in his life.
He was born in Memphis, Tennessee. He completed his bachelor’s in economics from the University of Virginia. After his bachelor’s, he got accepted to Harvard but he did not attend it. Because he was developing an interest in trading and thought to learn practically which he cannot learn at Harvard.
After his graduation, he went to his cousin to learn to trade. His cousin William Dunavant was the CEO of Dunavant Enterprise, one of the biggest cotton merchandising companies. He introduced Paul to commodity trader but got fired after some days, while he got sleeping on the desk during working hours.
When he was 24 years old became the commodity broker at E.F Hutton & Co. In 1980 he started his hedge fund named Tudor Investment Corporation.
Paul Tudor Jones top 5 Quotes
QUOTE No. 1
“When I develop an idea, I pursue it from a very-low-risk standpoint until proven wrong repeatedly, or until I change the viewpoint.”
- The key point to take away is he never starts off with a large bet or trade. He starts off small until he’s proven wrong.
- Important to understand if you’re looking to minimize your losses..
QUOTE No. 2
“I’ve missed a lot of meat in the middle, but catches a lot of tops and bottoms.”
- The key message from this is that Paul Tudor Jones is a contrarian he prefers to get the tops and bottoms correct rather than participate in larger trends (missing the meat in the middle).
- It shows that most trading strategies and styles work including Paul Tudor Jones Strategy of being a contrarian and picking reversals rather than a continuation of trends.
- One of the best ways to trade reversals is first understanding the fundamental value and then timing the market directions with technical analysis and sentiment
QUOTE No. 3
“Key is to play great defense, not great offense.“
- You won’t see Paul Tudor Jones making massive trades or bets.
- Rather you’ll see him focus on smaller trades but on big moves like reversals.
- In Test Cricket it is very important to defend rather than attack as keeping your wicket is more important than runs…game of patience.
- Likewise, he mentions that playing defensive will keep you in the game trading, whereas, playing a high-risk offense could get you killed.
QUOTE No. 4
“Never average losers. Decrease trading size when doing poorly, increase when trading well.“
- A key message to get from this is that when he’s not trading well and losing he will trade with less money rather than more.
- When traders lose and are losing constantly, they try to trade with more to regain their losses. This always ends badly.
- Paul Tudor Jones on the other hand does the opposite and risks less when doing poorly but more when doing well!
QUOTE No. 5
“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.“
Paul Tudor Jones Top 5 Trading strategies & Rules.
Rule 1: Stay consistent
“Where you want to be is always in control, never wishing, always trading, and always first and foremost protecting your ass”.
- There’s no point wishing your trades will work, instead you want to be consistent in your analysis, strategy, and approach.
- Don’t set yourself unrealistic expectations and over-leverage in the market..
Rule 2: Invest, this is not a get-rich-quick scheme.
“If everyone spent 90% of their time on that, not 90% of the time on pie in the sky ideas on how much money they’re going to make, then they will be incredibly successful investors”.
Rule 3: Know your Maximum Risk
“The most important rule is to play great defense, not great offense. 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 drawdown”.
- This means making sure you’re setting stop losses at points where the trade idea is no longer valid and planning out the maximum risk you can put on a single position.
- Everyone has different pain thresholds and risk appetites, but what you always want to be doing is protecting your capital.
Rule 4: If in doubt, get out
“If you have a losing position that is making you uncomfortable, the solution is simple. Get out, because you can always get back in.“
- Many traders out there are always wishing on prices to reach their take profit, even when the price starts moving towards your stop. Paul Tudor Jones specifically mentions if it’s making you uncomfortable then get out.
- If you’re getting scared of a trade and you’re constantly staring at your P&L then you’re probably not trading correctly and should probably get out.
- A nice tip you could do to soften losses is to reduce your position size partially as it moves to your stop loss, this way you reduce the overall loss but you can still stay in the trade.
- Additionally, following a systematic approach will heavily reduce the emotions in your trading.
Rule 5: Do your homework and know your edge
“It is not that we had any unfair knowledge, it is just we did our homework. People just don’t want to believe that anyone can break away from the crowd and rise above mediocrity”
- To tackle this issue make sure to historically test your strategy and any methods to see if it worked in the past, the more data the better.
- Different market conditions can heavily affect how well your strategy can perform.
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