Born in 1954, Paul Tudor Jones is a famous American hedge fund manager with average annual returns of about 20%.

 

Paul Tudor Jones Trading Rules

 

■ Trading the Market Reversals

I believe the very best money is made on the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms. The sweet spot is when you find something with a compelling valuation that is also just beginning to move up. That’s every investor’s dream.

 

■ The 200-day moving average matters

My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks, and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.” One principle for sure would be: get out of anything that falls below the 200-day moving average.

 

■ Markets trend 15% of the time and move sideways about 85 percent of the time

My contrarian trading was based on the fact that the markets move sideways about 85 percent of the time. But markets trend 15 percent of the time and you need to follow the trend during those times.

 

■ Never overtrade and don't ever average losers

First of all, never play a macho man with the market. Second, never overtrade. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don't have control. My guiding philosophy is playing great defense. Always maintain your sense of confidence, but keep it in check. 

 

■ Every day I assume every position I have is wrong

I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don't be a hero. Don't have an ego. Always question yourself and your ability. Only bet when the odds are substantially in your favor. Don’t bet unless you have a margin of safety.

 

■ Use a Time Stop along with a Price Stop

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 am not losing any money. I am always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have. At the end of the day, the most important thing is how good are you at risk control.

 

■ Volume Matters

When we came in on Monday, October 19, we knew that the market was going to crash that day. As the previous Friday was a record volume day on the downside. The exact same thing happened in 1929, two days before the crash.

 

 

 

■ Reward/Risk ratio

I’m looking for a 5:1 Reward/Risk ratio. Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose. I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket – that means there’s no reason to leverage substantially. There’s no reason to make 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 drawdown pain and maximum upside opportunities.

 

■ Be Contrarian to the Market

By watching my first boss and mentor, I learned that even though markets look their very best when they are setting new highs, that is often the best time to sell. He instilled in me the idea that, to some extent, to be a good trader, you have to be a contrarian.

 

■ Trading Macro and Thirst for Information

I love trading macro. If trading is like chess, then the macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader. The secret to being successful from a trading perspective is to have an indefatigable and undying and unquenchable thirst for information and knowledge.

 

 

■ Paul Tudor Jones

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