Paul Tudor Jones: “The most important part of trading is protection”

Trading – particularly in today’s world of computer technologies – is a profession for loners: it doesn’t really require anything other than money, information and access to the markets. However, even in this solitary world, Paul Tudor Jones managed to earn a reputation as a hermit who refused to go with the flow, aggressively, yet with invariable success. He earns millions – and does it with such a regular and cold-blooded attitude that his success can’t be attributed to pure luck.

Minion of fortune, or a determined workaholic?

Paul’s entire career in the financial market has always been smooth and successful. Maybe it was because he started as a broker, and not a trader – perhaps the nature of this profession gave him a chance to learn important things about trading, and to learn the typical errors made by speculators. One way or another, having earned about a million exclusively in broker’s commissions (did we mention Paul was successful in all of his trades?), he decided he would rather trade on his own.

Jones took his first deals to the New York Cotton Exchange. Again he was successful: lucky deals, millions in profits, but most amazingly – incredible, sometimes outright surreal stability. Over his first three years, this novice trader had only one bad – but not disastrous – month. Was it blind luck? Hardly, the exchange is not a casino… However, Jones quickly got bored with trading in the “pit” and opened his own hedge fund – since he had enough money to do that.

Do we really have to say that Jones became one of the best here? In 1984, he had 1.5 million under management; by 1987, clients trusted him with 330 million dollars. And they knew what they were doing: annual interest was regularly in the triple-digits. But 1987 was the year that really made Paul famous: during the October crash, literally all of the funds and private traders suffered great losses, while Jones, without cutting down much, grew his fund by 62% in that month alone.

Jones’ biography is a big run of further good luck, which still cannot be explained solely by luck. A regular occupant of the America’s top-200 wealthiest people list, Paul Tudor doesn’t like to talk about his deals, but we do have some information about his trading strategy. Paradoxically, despite being called “aggressive” by his fellow traders, his main principle is to focus on protecting his capital against losses, while letting profits “take care of themselves.”

Defense is more important than the attack

Going against the trends is traditionally called an ‘aggressive’ style of trading. For Jones, “it doesn’t make sense to trade with the trends, when half of the movement has already passed.” Paul prefers to look for breaking points when trades are reversed – and so far he has succeeded. Remember his uncanny skill for making money during crisis periods, when everyone else is out of money.

This strategy is indeed rather risky, but it seems that Jones’ experience as a broker and at working in the cotton “pit” have taught him some lessons in risk management. For example, he gradually reduces the size of new positions if the market seems to be taking a downward turn. As a result, even the darkest times end up with minimal losses. “It’s not about attacking, it’s about defending yourself properly,” Paul likes to repeat.

To catch the coveted breaking point, Jones can be incredibly persistent. Sometimes this happens after four or five tries. At the same time, he is always very strict with “stop-loss” – and this approach is ultimately what helps catch a good reversal move. As a result, Jones’ deals follow the Pareto principle: about 80% of the deals end up with small profits or small losses, but the remaining 20% make Paul Tudor a frequent member of the Forbes ratings.

Apparently this strict approach to money management is what explains Jones’ “magic” stability. Protecting capital above all else: if trading doesn’t go well and the losses reach 1-2% of the total deposit, Paul Tudor simply closes all of his open positions and takes a break. “You can always go back to trading. That’s easy enough. But exiting the market at the right time is an art form,” Jones comments, jokingly.

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