One of the most successful traders of all times, Paul Tudor Jones, started his own firm at the age of 26, after started trading cotton in the commodity pits. Paul produced 28 straight full years of wins.
One of his best known predictions is that of Black Monday in 1987, when the stock market crashed 22% in a single day. At that time most people saw their investments go down the drain, but Paul and his clients made a 60% profit in that month, and almost 200% in that year.
After his immense success in the stock market he started his Robin Hood Foundation to make a difference to people and give back to his community fighting poverty in New York City.
Just like Paul always looks for asymmetrical returns where the reward greatly outweighs the risk he takes in his financial career he is as meticulous in his foundation as well.
Paul sees himself more as a trader than an investor though. As a successful macro trader he studies the impact of world events, the flow of money around the world, mass psychology and analysis of technical and fundamentals of assets.
Instead of picking stocks Paul Tudor Jones focuses on bigger trends that are shaping the whole world by moving from country to country and over different sets of assets like currencies and commodities.
He is often asked to share his thoughts about what is happening in the world by the most influential leaders in the world, among them central bank officers and finance ministers of countries.
Paul Tudor Jones Trading Commodities
Paul started his career as a commodity trader in 1976. What he loved about trading commodities is that those markets, like cotton, soybeans, orange juice, are impacted directly by the weather.
In a time span of just a few years you’d see a lot of volatility and huge bull and bear markets involved. By trading that in his early years Paul learned how to interpreted market trends and how to trade bear markets and bull markets that fluctuate a lot by psychology.
He learned how quickly market sentiment could change and what you should do as a trader to prevent it from blowing up your account.
By sitting first row to see some people make their biggest profits in a day and losing it the other day again he learned how precious it all is when you have it. And how soon it can all be taken away from you again.
In that moment in life he learned that it is more important to focus on your defense to protect your account than it is to go on offense and be aggressive in the market.
How Paul Tudor Jones Manages His Risks
When you are holding a good position in an asset you don’t need to look at it every tick being glued to the screen. It will take care of itself.
You should mainly focus on where you are losing money.
Although that is exactly the opposite of what most traders will do.
Most failing traders look at their trades that are in a profit and are to eager to make some money.
They ignore their losing positions in the hope it will turn around into a profit.
Paul says you should be doing it the other way around, focus on your worst positions and watch them closely. Be ready to sell whenever it goes against your thesis of trading it.
Prevent the stock market from taking money out of your account. And let your winning positions ride higher and increase it’s positive impact on your portfolio.
Paul has created a process that he uses to manage his risks. He focuses on risk control everyday he walks into his office as the single most important thing on his agenda.
He never wants to be in a situation where he’s scared to open his account to look at his losses.
Make sure you are always in control of your trades.
You Must Stay In The Game To Be Able To Trade
In his early years Paul was eager to get trading that he went to his boss, Eli Tullis and kept asking when he could place his first trades.
He responded by saying that the markets will be there in 30 years, but the question is will you be?
That is a great lesson he learned there. If you want to become a successful trader you need to be in the game for the long run.
Most aspiring traders are looking for the holy grail to get rich quickly. But on the other hand they also want to become a full-time trader and be able to give up their day-job.
Off course if you become rich in a short period you’ll be able to quit your day-job.
But the most likely thing is it will never happen. In trying to do so you’ll be taking on risks that will wipe out your trading account.
If you really want to become a successful trader you need to be in it to win it in the long term.
As Paul often says: the turtle wins the race. Take it slow and be meticulous and you can become successful in becoming a successful trader.
One of Paul’s advice is to diversify your portfolio. Diversification is playing defense of getting your portfolio impacted heavily by one asset going down big.
Although he mentions that there is no set mix that you can advice that will be profitable in the coming years. It greatly depends on how things are working in the world.
Sometimes it is better to be more in stocks, sometimes more in commodities. And in those assets there will also be a diversification on which to own.
Paul Tudor Jones Strategy For Protecting Your Portfolio
You’re not going to always be in a situation to make a lot of money.
Sometimes you just have to say, “There’s no value here, there’s nothing compelling. I’m going to be defensive and run a portfolio where I don’t have any great expectations. I’m going to be in a position where I don’t get hurt, and if and when values do rise, I’ll have some firepower to do something.”
Paul teaches an undergrad class at the University of Virginia, in which he tells his students you don’t need to go the business school.
You only need to remember two important rules.
The first one is; you always want to be with whatever the predominant trend is.
You don’t ever want to be a contrarian investor that goes against the overall market trend.
Two of the most wealthy people in the world, Warren Buffett and Bill Gates did exactly that to become as rich as they are.
Bill Gates got his money by owning a stock, in his own company Microsoft, that went up eight hundred times while staying with the trend as well.
Off course Bill also had some influence on the course of Microsoft to make it successful.
Warren Buffett on the other hand focused on buying great companies for a good price, and just hold them forever.
He held the best companies, according to his criteria, through tough times and made use of compounding his gains into a fortune.
Both stayed with the trend that was there in their own investing circle.
Paul Tudor Jones determines the market trend by looking at the 200-day moving average of closing prices.
According to Paul when you use the 200-day moving average as an indicator for when to really get out of your position you’ll never be going against the main long term trend.
It is the exact indicator that he used for his biggest trade in during Black Monday in 1987. When the market dropped below the 200-day moving average he knew he had to close his positions to prevent his account from going down.
At the top of the market, right before the crash Paul was flat and out of any positions. Prepared for the crash.
While other traders were going wild because of the new highs of the market.
When the market gradually got back up after the crash, and it started trading above the 200-day moving average Paul got back in and was ready to make the rest of the nearly 200% profit of 1987 for him and his clients.
Paul Tudor Jones Risk-Reward Ratio of 5-to-1
The second rule he learns his undergrad students of the University of Virginia to prevent them from going to business school is the asymmetric risk-reward ratio of 5-to-1.
It simply means Paul is always looking for trades where he finds an asymmetric risk-reward of 5-to-1 where he is willing to risk 1 dollar to make 5.
By focusing on a 5-to-1 ratio you can simply be wrong 20% of the times and you’ll still be able to make money.
So even if you’re a complete imbecile (Paul words, not mine) you can be wrong 80% of the times and you’re still not going to lose.
If you combine it with good risk control you are guaranteed to become a successful trader and grow your account.
The hardest part is that we never rally calculate you entry points in a way where you determine the risk-reward ratio.
For myself I’ve created a Trading Performance Spreadsheet that greatly helps me in determining the risk before entering a trade.
Using Paul Tudor Jones’ Trading Strategy Trading the Corona Crisis
One principle from Paul of become a successful trader is to sell whatever is trading below it’s 200-day moving average to protect your portfolio from any real big draw-downs.
If you manage to do so you will always be protected for any market crash, he says.
Let we just had a perfect market crash to test his opinion on that. So how could Paul Tudor Jones Trading Strategy have protected you in the Corona crisis.
Let’s take a quick look at the most recent crash of the $SPX and see how the 200-day moving average rule from Paul Tudor Jones could have helped you.
- Market high was at $3393.50 on February 19th.
- The red line is the 200-day moving average.
- The orange arrow show the day that the $SPX closed below it; February 27th.
- The 200-day moving average was at $3046.60 on February 27th.
- Selling at that moment would be a 10% loss.
- The $SPX dropped a lot more after that, let’s pick $2300 as a sell point when you really got scared.
- Selling at that moment would be a 32% loss.
Does that make a lot of difference in your trading results? Yes it does.
For a 10% loss you ‘only’ need to make back just over 11% in order to break even again.
For a 32% loss you will need to make about 45% to get back to break even.
Have you already read our free ebook with the 14 Common Trading Rules that the most successful trader in the world use? Yes, we’ve also used Paul Tudor Jones’ trading rules to create that book.
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