The 15 Most Important Trading Rules from Paul Tudor Jones
October 19th, 1987. The day we all got to know as Black Monday. For almost everybody involved in the stock market this was one of the worst days to be alive. But not for this guy. This guy managed to make one of his best trades in that week. His name is Paul Tudor Jones. When someone can achieve such impressive success for himself, his clients and his firm it pays to pay attention to the things he says.
If you can’t see your own mistakes and learn from them you’re never going to be a trader for a long time.
Paul Tudor Jones’ achievement in the market crash of 1987 has been filmed in Trader: the documentary. Which is only rarely available.
It is said that Paul didn’t like how he is portrait in the movie. And he might have something to do with the few amount of copies available today.
Paul Tudor Jones is one of the most successful traders of the past century. His net worth is around $3.3 Billion and he mainly focuses on short-term trading.
The New York Times reported in March of 2014 that Paul can “claim long-term annual returns of close to 19.5 percent in his $10.3 billion flagship fund, Tudor BVI Global.”
We’ve collected the most useful trading rules he has been using to become successful.
01. “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.”
On of the most important skills to learn as a trader is to leave your ego out of your work. As soon as you get the feeling you’ve got everything under control you’re going to screw up really soon.
Simply because you can never be in full control of the stock market. The only control you have is your own actions. How you react to the changing market conditions is what is in your circle of influence.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 Klik om te Tweeten
02. “Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.”
Be sure to be in full control of your own actions. You are the only one fully responsible for your success or failure in the market. Define your trading rules and get disciplined to stick to them.Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.” - Paul Tudor Jones Klik om te Tweeten
03. “There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market.”
There are a lot of places where you can learn about the stock market. Our site is off course one of them. But with all the hard work we put in making the best study material possible the best teacher is the market itself.
No matter how good you’ve been preparing yourself to anticipate every move in the market. There will be many surprises that you didn’t see coming. The only thing you can do is be meticulous about your trades.
Always have your trading plan ready. Especially your exit strategy. When things don’t go your way, just get out of your position.
04. “The most important rule of trading is to play great defense, not offense.”
Most beginning traders are anxious to trade all the time. They keep looking for potential good trades and enter them way too soon. Without having a real trading plan before going in on a trade.
Beginning traders focus on their offense.
While pro traders focus most of their attention on playing defense.
They know there are, and will always be, a lot of great opportunities in the stock market.
There is no need to rush into a trade without having your trading plan ready. Instead the first thing you need to control is your risk management and your exit strategy for every trade.
Never risk too much of your capital, because you never know how the market will surprise you.
05. “When I trade, I don’t just use a price stop, I also use a time stop. If I think a market should break, and it doesn’t, I will often get out even if I’m not losing any money.”
One of the keys things for proper risk management is to use stop losses in your trading.
The best known are off course price stop losses. Being sell orders that get triggered when your stock hits a certain price to protect yourself from losing to much money.
Another great stop losses you should be using is a time stop. When you enter a trade you anticipate a certain price move.
With a time stop you set a specific time frame for this move to happen. And when it didn’t you cut your position.
No matter if you’re taking a loss, or are in a small profit. The stock isn’t acting the exact same way as you expected so there is no reason to keep your money in it.When I trade, I don’t just use a price stop, I also use a time stop. If I think a market should break, and it doesn’t, I will often get out even if I’m not losing any money.” - Paul Tudor Jones Klik om te Tweeten
06. “Failure was a key element to my life’s journey.”
Have you ever failed at anything? I bet you do. And probably a lot in your lifetime as well. We certainly did.
Especially in our trading journey we’ve made tons of mistakes. But the good thing about making mistakes is that you’ve run into something that is better to avoid.
Now the key thing with making mistakes is learning from them.
By learning from your mistakes you can improve yourself and grow into the future.Failure was a key element to my life’s journey.” - Paul Tudor Jones Klik om te Tweeten
07. “You always want to be with whatever the predominant trend is.”
Every great trader in our history have said something similar to this. When trading stocks you always want to follow the overall market trend.
Simple mathematics shows that the odds are greatly in your favor when trading in the same direction as the market.
Don’t try to argue with the market trend when you’re a trader.You always want to be with whatever the predominant trend is.” - Paul Tudor Jones Klik om te Tweeten
08. “After a while size means nothing. It gets back to whether you’re making 100% rate of return on $10,000 or $100 million dollars. It doesn’t make any difference.”
For most of us there will never be a time where we can really say if trading with $100 million is the same as trading with a smaller account.
But the key take-away from this quote from Paul Tudor Jones is that your trading strategy doesn’t get influenced by your account size.
You should always have a clear strategy and follow your trading plan. Also your position sizing should be roughly the same. Percentage wise that is.
That’s one of the great thing about trading and why you can also get started with a small account. You still need to learn how to properly handle your account and trades.
After a while size means nothing. It gets back to whether you’re making 100% rate of return on $10,000 or $100 million dollars. It doesn’t make any difference.After a while size means nothing. It gets back to whether you’re making 100% rate of return on $10,000 or $100 million dollars. It doesn’t make any difference.” - Paul Tudor Jones Klik om te Tweeten
09. “At the end of the day, your job is to buy what goes up and to sell what goes down.”
It doesn’t get any harder than this. To be successful in trading all you need to do is buy stocks that will go up and sell them at a higher price.
And the same goes for the down side. Short stocks that are going lower and buy them back at a higher price.
Don’t make it much more complex than this.
Understand that this is your main objective. Now all you need to learn is how to identify the stocks that are going to make a move.At the end of the day, your job is to buy what goes up and to sell what goes down.” - Paul Tudor Jones Klik om te Tweeten
10. “Every day I assume every position I have is wrong.”
Another great trading rule from Paul Tudor Jones that has everything to do with trading biases.
Most of us have something called a confirmation bias. It is a human habit to search for confirmation after making a decision.
In trading this means that when you’re in a trade you start looking for information to confirm your trade.
Paul does the opposite of this. He assumes that everything at the moment is wrong. And starts looking for evidence that he really is wrong.
Only when you can’t convince yourself that you are really wrong with your position you can become confident that you hold a good trade.Every day I assuma every position I have is wrong.” - Paul Tudor Jones Klik om te Tweeten
11. “Losers average losers.”
Never average down own a stock. Don’t buy more into a stock when the price has dropped after your initial buy.
Yes, the shares are cheaper at that moment. But it mainly means that the stock has moved in the opposite direction than you expected it to be.
Or to put it more directly. It means that you are wrong.
Don’t average down on a losing position. In fact, do the opposite. Avarage up on your position that show you a profit.
When your analysis is proven right, so time to back it up with more of your capital.Losers average losers.” - Paul Tudor Jones Klik om te Tweeten
12. “You adapt, evolve, compete or die.”
If you can’t learn from your mistakes your future in the stock market looks hopeless. It is important to see your mistakes and adapt accordingly.
Always be meticulous in your trading actions, so that you’ll always know what have lead to making a bad trade.
When you know where it went wrong you can adapt your approach the next time. By doing that every trade you’ll evolve into a profitable trade.You adapt, evolve, compete or die.” - Paul Tudor Jones Klik om te Tweeten
13. “When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position when my trading is worst.”
Most traders feel the need to get back after a losing streak by trading bigger position sizes. One very useful trading rules from Paul Tudor Jones is (again) the opposite.
When you’re in a losing streak it means you’re trading poorly. In that case you shouldn’t want to risk more of your money.
Simply because the chances of losing are bigger at that time. So why choose to lose more of your account?
Instead Paul advises to do the opposite. When you can’t seem to trade profitable for a while cut down the size of your positions. Risk less of your account until you get back in sync with the markets.
And when you’re completely in sync with the markets and you’re in a flow of strong trades that is the time to start increasing your position sizes.When I'm trading poorly, I keep reducing my positiion size. That way, I'll be trading my smallest position when my trading is worst.” - Paul Tudor Jones Klik om te Tweeten
14. “At the end of the day, the most important thing is how good are you at risk control. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.”
As said earlier risk management is one of the key areas to learn as a beginning trader.
This quote illustrates to complete basics of it.
When things are going your way, give them the time to develop. Let them ride and increase your profits.
On the other hand, when things are not going as you anticipated, don’t hesitate and sell your position as soon as possible.
Don’t worry that you’ve made the wrong decision by selling your position when thing doesn’t look that good. You can always buy back when everything looks strong again.At the end of the day, the most important thing is how good you are at risk control. If you're uncomfortable with a losing position, get out, because you can always get back in.” - Paul Tudor Jones Klik om te Tweeten
15. “I look for opportunities with tremendously skewed reward-risk opportunities. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities”
Another part of risk management is not only position sizing to make sure that you won’t kill your account with a single trade. But also to analyse the risk/reward ratio for every trade.
With every trade you make you need to make sure that the odds of profiting from it outweigh the odds of losing your money.
The exact ratio is up to you to decide. Paul Tudor Jones uses a risk-reward ratio of 1:5. Meaning that for every $1 he risks he’s looking to make $5 in profit.There is no reason to take substantial amounts if financial risk ever, because you should always be able to find something where you can skew the reward-risk greatly in your favor.” - Paul Tudor Jones Klik om te Tweeten
What trading rules from Paul Tudor Jones did we miss that you believe should be included as well?
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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