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Market Wizards: Interviews with Top Traders by Jack D. Schwager

March 24th, 2009

Paul Tudor Jones – The Art of Aggressive Trading

This was one of my favorite interviews.  It starts off when he recounts getting nearly wiped out from a bad trade, “I was totally demoralized.  I said, ‘I am not cut out for this business; I don’t think I can hack it much longer.”  I was so depressed I nearly quit.”  This was a recurring theme in all the interviews.  Each of these ‘bust’ or ‘near bust’ events nearly caused the traders to quit.  His ‘bust trade’ was also a single position trade, and afterward, it caused him to focus more on discipline and money management.  The following says a lot about Tudor Jones’s disposition and character:

It was a cathartic experience for me,  in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit.  I was determined to come back and fight.  I decided that I was going to become very disciplined and businesslike about my trading.

His trading then became quicker and more defensive.  He was always thinking about not losing money as opposed to making money.  Before his ‘bust trade’ he would have a vision of where he thought the trade would go and how much money he would make.  Afterward, he would think only about his stop and how much money he could potentially lose.

His goal is never to have a double digit down month, and so he has a 9% stop on his equity in any one month.

Trading rules that Tudor Jones lives by include:

  1. Don’t average losers decrease trading volume when trading poorly.
  2. Increase trading volume when you are trading well.
  3. Never trade in situations where you don’t have control – for example, don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.
  4. If you have a losing position that is making you uncomfortable: get out.  There is nothing better than a fresh start.
  5. Don’t be too concerned about where you got into a position.  The only relevant question is whether you are bullish or bearish on the position that day.  Always think of your entry point as last night’s close.
  6. The most important rule of trading is to play great defense, not great offense.  Know where your stops are and get out immediately if things are going the wrong way.  Limit losses religiously.  I have a short term horizon for pain.
  7. Don’t be a hero.  Don’t have an ego.  Don’t ever feel like you are a good trader.  The second you do, you are dead.  If you make a good trade, do not think its because you have some uncanny foresight.  Maintain confidence, but stay humble.

To sum up some Tudor Jones’s mindset:

I am more scared no than I was at any point since I began trading, because I recognize how ephemeral success can be in this business.  I know that to be successful, I have to be frightened.  My biggest hits have always come after I have had a great period and I started to think that I knew something.

Another major theme among these great traders is that they all say that they ‘wait’ and sit the market out when they are uncertain about a position or market direction.  The novices will tend to be in the market, just to be in the market.  The great trades are in the market only when the probability for success is great.

Tudor Jones says that its very important to focus on the future and where marekts are headed versus what has happened up to the present point.  He says this is one of his greatest strengths.

In terms of market action, Tudor Jones says that he uses a system that follows trend breakouts from trading ranges.  He says that if there’s a sudden range expansion ina market that has been trading narrowly, human nature is to try to fade that price move.  But when you get a range expansion, the market is sendign you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.

In conclusion, Tudor Jones answers the question of ‘what is the most important advice you could give the average trader?’ with:

Don’t focus on making money; focus on protecting what you have.  Play great defense, not great offense.


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