7 Secrets to Paul Tudor Jones’ Market Wizardry

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The blog post explores 7 trading truths that helped make Paul Tudor Jones a Market Wizard

Paul Tudor Jones – Market Wizard

2 Nice documentaries highlighting Tutor Jones’ career

Find them HERE

and HERE

 

PTJ’s 7 Secrets to Market Wizardry

 

  1. “Don’t ever average losers.

    • PTJ: ”When a trade is going against you it means you are wrong. Adding to a loser just usually makes it bigger and your stress overwhelming.
    • Comment: This axiom is high up on my personal list. Here I will also refer to the wisdom offered by Market Wizard Jesse Livermore. “I always buy on a rising scale”.  Buy on the way up, not on the way down. The first step to working yourself out of a hole is to stop digging or better yet, never start. In my years of both trading and observing other traders is that averaging down is a surefire path to ruin. If averaging down is part of your regular routine, please stop.
  2. “Never trade in situations where you don’t have control.”

    • PTJ: Getting into a trade that you can’t easily get out of is a dangerous trade in itself. Liquidity risk, headline risk, and volatility can be dangerous when you are at their mercy.
    • Comment: While I doubt many of us are so lucky to be faced with the problem of having a position so big that it makes it hard to get out, there are some considerations to consider.  I avoid battleground stocks that are constantly in the headlines. In general they trade poorly to the technicals with wild bars printing regularly off tweets or headlines. I avoid trading earnings. It’s in the category of “no control, no edge”.  I avoid tickers with low volume, illiquid option chains with a wide big /ask spread. They are generally roach motels. You will pay the ask to get in, but be forced to close the position at the bid. Market Makers will not be compelled to give you the mid-point on a fill. The slippage in these set ups make it tough to win, even when you’re directionally correct. Lastly, there are times when volatility becomes so great that it either exceeds my comfort zone or skill level. In those cases, I do my best to recognize it and simply step aside.
  3. “If you have a losing position that is making you uncomfortable, the solution is very simple, Get out.

    • PTJ: Many times exiting a trade is the easiest way to stop a losing trade from getting worse, managing stress, or freeing up capital for other uses. You can always get back in.
    • Comment:  Market Wizards have a common trait. When something isn’t working, they GTFO and fast! The Market Wizard books well document that trading titans like PTJ and Soros in particular would walk into the office on any random day and clear their accounts. Soros in particular would fax Goldman his whole book and say “How much?”  He’d get his price and blow out the whole account. Essentially hitting the reset button. It could be a general unease with how the book was set up or new information could have come to light. The reason really doesn’t matter. If you’re uncomfortable for any reason don’t hesitate to get out.  In reading about PTJ it was often his policy to close out any losing positions at the close of business on a Friday so he could head into the weekend feeling good and with a light heart. It didnt matter if he opened the position on Wednesday, if the position was red he would close it. Something to consider.
  4. “Don’t be too concerned about where you got into a position.”

    • PTJ: All that matters about your current positions is what you should do now based on the current price action not your cost basis or entry level.
    • Comment:  Look at your positions fresh each day. Are bullish technical events happening or are the bears beginning to make inroads?
  5. “The most important rule of trading is to play great defense, not great offense.”

    • PTJ: Trading offensively is trying to grow you capital while defense is protecting what you have. Winning trades are how many points you score and losing trades is how many points you give up to the other team. While offense is great for a show defense wins championships.
    • Comment: To a trader / investor trading capital is life. It is what keeps you in this game. Without capital you are shown the exit door. Contrary to popular belief, your first obligation in markets is to preserve capital, not make it.  Essentially your participation in markets is a race.  A race between you staying in the game long enough to become consistently profitable or blowing out your account. Countless market wizards preach defense and risk management. Make great defense a core tenet of how you approach markets. It will keep you in the game as long as possible. 
  6. “Every day I assume every position I have is wrong.”

    • PTJ: Mental flexibility is the ultimate effective habit of successful traders. Being willing to accept that a trade is wrong will lead you to cut losses fast, keep losers small, and lose your opinion not your money.
    • Comment:  Those familiar with my work will quickly recognize this…..”Be a leaf on a stream”   Mentally flexible and delighted to follow the market flow higher or lower without fighting it.  Leaves on streams are agnostic. They have no bias toward direction. Happy to go with the flow. Be the same on your trades.
  7. “Don’t have an ego. Always question yourself and your ability.”

    • PTJ: Being over confident and arrogant leads to trading too big and staying on the wrong side of a trend for too long. Most account blow ups and ruin comes when a trader believes they are smarter than the markets and stay with their strong convictions after being proven wrong.
    • Comment: The wisdom “Pride cometh before the fall” has stood the test of time. The moment you allow yourself to think you’re special, be afraid, very afraid. EGO has no place in trading.

Putting it in Context  

At the end of the day all trader’s need to form their own process and framework for success. Within that framework I believe there should be embedded truths that should not be violated. Luckily for us there is a great amount of wisdom Market Wizards have shared with us that point to those truths. The primary question is whether you will accept them as truths or will you have to discover those truths on your own knowing that pain will result from that process.

 

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