The Shifting Shares View: What we can learn from multi-billionaire trader Paul Tudor Jones (Part 2)

By Richard Mason


Following on from Part One, Michael Taylor looks at some more perals of wisdom from multi-billionaire investor Paul Tudor Jones – founder of Tudor Investment Corporation.

Don’t be too concerned about where you got into a position

People love to anchor themselves to a certain position and a certain price – usually the price that they bought in at. They often suffer from the ‘breakeven’ trade.

This is where a trader will either move his stop to breakeven, so that it is a ‘risk-free trade’, or will only want to sell when the price reaches the breakeven point.

The idea of a risk-free trade is baloney. Every trade has risk. There’s no escaping it. If you’re 30% up, but you’ve got a ‘risk-free trade’ and the price drops back and you’re closed out at breakeven – you’ve just lost 30%. That was real P&L – and real money – that you didn’t cash in, because you had a ‘risk-free trade’.

Getting anchored to a sell price usually leaves a trader worse off too. The price will rally, miss their sell price by a few ticks, then proceed to continue to dump – leaving the trader wishing they’d sold.

Every day I assume every position I have is wrong. I know where my stop risk points are going to be.

This is one of the most important things to know – where you’re getting out. If you don’t know where you’re getting out, then you’ll close the trade at a sub-optimal point – regardless of whether the trade is a profit or a loss.

Not knowing where to get out when a position is sliding south will inevitably end up with the trader reaching the emotional stop loss, where the pain of loss becomes too great and the trader ends up selling! This, of course, is usually the point when they probably should be buying, as the stock has puked so much it is due a bounce. Cutting losses quick is one of the most important jobs of a trader.

Everything gets destroyed a hundred times faster than it is built up

It’s said that greed climbs a wall of worry, whereas fear takes the express elevator downwards. Nothing spooks the market like a rapidly falling share price, and this is often exacerbated by fear and panic, market sells, and shorters jumping on board the trend. Always be vigilant about your positions, because as we have seen in Tullow Oil (LSE: TLW) this week – we’re only ever one bad RNS away from a halving in our position.

You always want to be with whatever the predominant trend is

The trend is your friend, and regardless of what time frame we trade we should always trade on the right side of the trend. Otherwise, we’re gambling. Trends are often boosted by positive reinforcement feedback – a stock goes up, and others believe it to be a good stock, and so they buy too, forcing the stock higher. Trends can last days, weeks, months, and in some cases even years!

This is especially important when shorting, because one who shorts into strength is not only betting against the trend but also is leaving themselves open to large losses.

At the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PEs?

If we look on our trading screens, there isn’t a column for PE, EV, PEG, or any fundamental metric. But there is always a column for P&L.

This column is the true acid test of whether what you are doing is successful or not.

Author Michael Taylor’s website contains numerous tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.


Author: Richard Mason

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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