16 risk management tips from Paul Tudor Jones every trader should learn

There are a handful of investors whose trading style resembles the skills of a street fighter and who have an instinct to spot market reversals quickly.

One of these legendary fund managers was Paul Tudor Jones, whose successful trading strategies have been admired and followed by many investors around the world for decades.

Jones defined investing as a process of self-discovery. He said it might take a few failed attempts to find the right strategy that works for an investor.

He felt that when investors try to come up with good investment strategies, they are forced to face challenges and are sometimes tested, which would cause them to question their decisions.

(Masters of the Markets: Find out other investment strategies and trading tips from the market’s greats)

“There are two unpleasant experiences that every trader will face in their lifetime, at least once and most likely several times. make a winning trade again. And secondly, there will come a time when you will start to wonder why you are making money and if it is really sustainable. This first experience tests the courage of an individual; does he have the stamina, courage, courage and intelligence to stand up and resume battle? This second moment of enlightenment is actually the most frightening one, because it recognizes a certain lack of control over anything, ”he said in an interview in the book Reminiscences of a Stock Trader.

Paul Tudor Jones is a hedge fund manager famous for his global macro operations. He is the founder of the hedge fund Tudor Investment Corporation and was ranked 108th richest American and 345th richest in the world in 2014. He started working in the trading rooms as a clerk, then became a broker in his. beginnings.

Jones is famous for predicting Black Monday in 1987, when he tripled his money in his major shorts.

Jones previously served as Director of the Futures Industry Association and was instrumental in the creation and development of the Washington DC-based education arm of the association, which was later renamed the Institute for Financial Markets.

Jones’ legendary trading strategy

Jones is famous for taking a contrarian approach and strives to buy and sell stocks at turning points. He keeps trying a trading idea until he fundamentally changes his mind. Otherwise, it continues to reduce the size of its position.

Risk management is at the heart of his trading style and Jones never thinks about what he could gain from any given trade, only what he could lose.

Let’s take a look at some of the timeless trading lessons Jones shared, many of which would be very relevant to investors even then.

1. Don’t be a hero. Don’t have an ego. Always question yourself and your ability

It is very important for an investor to learn to let his ego work. As soon as you start to feel comfortable and believe that everything is under control, that’s when she falters.

You have to accept that he / she can never have full control of the stock market. The only thing one can control is one’s own actions and how best to react to changing market conditions.

2. Be in control of your actions, and above all, always protect your buttocks

One should have full control over his own actions, as they are the only ones fully responsible for their success or failure in the market.

An investor should set their own trading rules and stay disciplined in sticking to them.

3. No training or class can prepare you for trading

There is a lot of training and education that can be taken on how to be successful in the stock market, but the best lessons can only be learned by trading in the market.

No matter how prepared you are to anticipate every move in the market, there will be plenty of surprises in store that they might not have anticipated.

4. The most important rule of trading is to play a good defense, not an offense.

Investors should focus most of their attention on a defensive strategy when trading. Most newbie traders are eager to trade all the time and try to follow an offensive strategy. They keep looking for good potential trades and make the mistake of entering them too early without having a real trading plan.

Jones says you have to realize that there are, and always will be, a lot of great opportunities in the stock market and that you don’t have to rush into a trade without having the plan. trading loan.

The first thing an investor needs to do is control and manage their risk and form an exit strategy for each trade. You should never risk too much capital, because the market can surprise at any time.

5. When I trade I don’t just use a stop price, I also use a time stop.

In order to properly manage risk, traders should use stop losses in a trading strategy. Stop losses trigger “sell” orders when a stock hits a certain price to protect the investor from losing too much money. Another great stop loss can be to use a time-based stop loss.

“With a time stop, you can set a specific time frame for a move to occur. And when it doesn’t, you cut your position no matter if you take a loss or make a small profit. . The stock is not acting the way you expected it to. So there is no reason to keep your money in it, “he says.

6. Learn from your mistakes to improve and grow in the future

Investors are bound to make tons of mistakes in their trading journey. But the advantage of making mistakes is that it gives an opportunity to learn from them.

7. You always want to be with whatever the predominant trend is
It is natural that investors always want to follow the general market trend when trading stocks. Jones therefore says that this trend should not be disputed as the odds are greatly in their favor while trading in the same direction as the market.

8. After a while, size doesn’t mean anything

You need to have a clear trading strategy and follow your trading plans, regardless of the size of your investment. One should start with a small amount at the beginning, so that she can learn how to manage a trading account, after which one can slowly start to increase the size of the investment.

9. Ultimately your job is to buy what goes up and sell what goes down.

To be successful in trading, all traders need to do is buy stocks that are going to go up and sell them for higher prices. Likewise, they should short sell falling stocks and buy them back at a lower price. Traders should keep it simple and understand that this is their main goal for which they should learn to identify which stocks are going to move.

10. Every day I guess every position I have is wrong

It is human nature to seek confirmation after making a decision, this is called confirmation bias, and in trading it means that traders would start looking for information to confirm a trade.

But Jones advises traders to do the opposite and assume that the trade they plan to execute is wrong and that they should look for evidence against it. “It’s only when you can’t convince herself that she is really wrong about a position that she has to become confident that she has a good job,” he says.

11. Average losers losers

Investors should not buy more in a stock when the price has fallen after their initial purchase. Stocks may be cheaper at this time, but this mainly means that the stock has moved in the opposite direction than expected. It is therefore not necessary to reduce the average of a losing position and to do the opposite and the average of its position which shows a profit. “When your analysis turns out to be right, it’s time to back it up with more of your capital,” he says.

12. Adapt, evolve, compete or die

Traders need to spot their mistakes and adapt accordingly. They should always be meticulous in their trading actions, so that they know what caused them to make a bad trade.

“When you know where it went wrong, you can tailor your approach next time. By doing this, every trade you take will evolve into a profitable trade,” he says.

13. When I trade badly, I keep reducing the size of my position

Most traders feel the need to bounce back from a streak of losses by trading larger positions. But Jones thinks that when traders are on a losing streak, it is best for them not to risk more money. They should reduce the size of their positions for a while and avoid taking risks until they are in sync with the market again.

14. The most important thing is how well you control the risks.

Risk management is one of the key areas to learn as a trader. When things are going well, traders should give their trade time to grow and let them go up and increase their profits. On the other hand, when things don’t go as planned, they should not hesitate and sell their position as quickly as possible.

“Don’t worry if you’ve made the wrong decision to sell your position when things aren’t looking great. You can always redeem when everything looks solid again,” he says.

15. Look for highly biased risk-reward opportunities

It is important for traders to analyze the risk / reward ratio for each trade. With every trade, traders need to make sure that the odds of profiting outweigh the odds of losing money.

16. Have an indefatigable, eternal and unquenchable thirst for information

Traders cannot find poorly priced assets unless they have an investment advantage and that advantage can come from better information and knowledge. They should strive to gather more information and knowledge that can help them trade better and be successful in the long run.

(Disclaimer: this article is based on various interviews with Paul Tudor Jones)


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