Paul Tudor Jones is an American trader and investor, and founded his own hedge fund, Tudor Investment Corporation. He was estimated to be worth $5.1 billion from a recent Forbes article as of November 2019, and it’s clear that he can teach us all a thing or two about trading.
Paul Tudor Jones trades anything and everything – if it moves, he’ll trade it. He very often takes a contrarian view in order to make his money. Paul is also a master at continuing to take the trade even if it fails, until his idea changes. This is something that I have experience with, as I might get stopped out twice, ignore the trade a third time, only to watch it boom ahead without me in it.
Here are some of Paul’s greatest rules:
Never play macho with the market and don’t over trade
This is a rule many of us can relate to – if you’ve ever been on a big winning streak and all of a sudden felt like Billy big boots, only to then give back your hard-earned profits and more, then this is exactly the rule for you. I’ve done it before, and it’s not nice.
Overtrading is also a big problem for many private investors and traders. It’s easy to get bored, or want to make some money from the market because you want to pay for something, only to lose your money.
Most private investors would be better suited trading less, but trading in larger size on their most competent set ups. A good way of working out your best trades is to look at your journal, then look where your biggest wins and most frequent wins have come from. If you don’t know this – how can you expect to improve?
Losers average losers
Paul Tudor Jones is famous for having taped “losers average losers” on a note above his trading monitors. This is because he knows that the maths don’t work in a trader’s favour.
This is because when a trader is down 25%, they need to make 33% back to just to hit breakeven. The numbers cumulatively work against us too – a loss of 33% requires a gain of 50% just to get back to where we were!
This is why only losing traders average losers. Many strategies do involve averaging down – and if it works, then fine. But the only way to guarantee that you don’t keep averaging down only to lose all of your money is to just not do it.
Never trade in situations you don’t have control
As a trader, risk management is of the utmost importance. Therefore, ‘trading’ on situations that we don’t have control over is not trading – it’s gambling.
Why would you buy a stock that has a drill result expected imminently? Yes, the upside is large if the drill strikes. But what if it doesn’t? It’s a large percentage loss – which we already know work against us.
Others like to gamble on Phase III trial results. Everyone expected Immupharma to pass its Phase III trial for its asset Lupuzor. But the trial results failed to meet the primary endpoint.
The same happened with Motif Bio earlier in the year – it tanked 80%. But money could’ve been made both times on those stocks by scalping the bottom, with Motif even moving 200% from its lows. There was money to be made – but not by those who’d gambled on the result and lost it all.
Author Michael Taylor’s website www.shiftingshares.com contains numerous tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.