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Paul Tudor Jones on Trading, Ego, and Risk Management

This post originally appeared in issue #3 of the Finance Trends Newsletter. Subscribe to our email list today to receive new updates as soon as they are published.

Hello, subscribers! 

I hope you are enjoying your weekend. Today I'd like to offer you a quick piece of trading wisdom from one of the greats in this business, Paul Tudor Jones.   

If you're not familiar with "PTJ", get yourself a copy of the original Market Wizards book (in which he was interviewed) or Google him.
 

In the trading and hedge fund worlds, Paul Tudor Jones is widely admired and is probably as well known to professional money managers as Warren Buffett is among individual investors. Some have even called Tudor Jones, "the Michael Jordan of trading". 

"So what does that have to do with me?", you may be asking yourself.

Well, if you are a trader or an individual investor, or even if you just know someone (say, a family member) who is investing their own money in the markets, then it has a lot to do with you!

Everyone in the markets is hoping to grow their capital over time, but there are many pitfalls that prevent would-be traders and small investors from reaching their financial goals. 


Today I'd like to briefly touch on two of these trading or investing pitfalls: ego (the need to be "right"), and fear of taking losses, or loss aversion. 

With some help from Paul Tudor Jones, I'll show you how you can address these natural human tendencies, or pitfalls, that may seriously derail your financial success. By becoming aware of these tendencies in ourselves, we can a) acknowledge these potential problems and b) learn to deal with them ahead of time by accounting for the inevitable in our investing and trading plans. 

Now, first thing's first. You will have losing trades or investments that go south. That is a certainty. How you deal with the losing trades will be a crucial part of your eventual success, or failure, as a trader
 
Will you stubbornly hold on to your losers as they move against you and the losses mount up? Or will you learn to cut your losing trades before they drain a significant part of your capital? Remember, preserving your money and your "emotional capital" (your sanity) are key to survival in this money game. 


Now here is what Paul Tudor Jones said about the likelihood of encountering losing trades and cutting his losses:

“The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong."

Paul Tudor Jones trading risk management wrong assume quote


Did you catch that? One of the greatest traders in the world is saying that he starts off with the assumption that every single trading position he has is wrong or about to be proven wrong. When the market decides that he is "wrong", he simply takes his loss and moves on, or re-enters the trade at a later date. 

If you can determine your "stop point" before you enter a trade, you go a long way towards determining the money you have at risk in the market. By cutting your losses earlier in a trade that goes against you, you are taking steps to preserve your overall account. You survive to trade another day.

Don't let a single losing trade or a series of losing trades blow up your account. 


Next PTJ tip: "Don't have an ego. Always question yourself and your ability."

Paul Tudor Jones trading quote ego question yourself


In other words, don't start to get too cocky when you've had a run of success in the markets. You'll often find that this attitude may bring about your undoing.

You may recall the famous Bible Proverb: "Pride goeth before destruction, and a haughty spirit before a fall." That definitely applies to trading and investing.  

Ego and a stubborn need to be "right" will be your undoing in the market.

Loss aversion is a natural tendency in human beings, so it is one we must account for ahead of time. Plan for the inevitable losses and cut losing trades before they grow beyond your control. Don't let your losers drag down your winners! As Peter Borish, former partner at Tudor Investment Corporation, said in a Bloomberg TV interview last year:

"It's all about making money - not being right.

Too often, people get stubborn. The point is to be flexible. The market is always right. That's one of the main things I learned from Paul... you've got to be around to play for another day. That's capital preservation."

Save these quotes. Bookmark them, print them out and put them on your wall or your trading monitor. Share this wisdom with trusted friends and family members who are navigating their way through the investing jungle.

We can profit from the wisdom of more experienced traders and use their experience to guide us. We may not reach their heights of success and we can't all become the "Michael Jordan of trading", but we should always strive to do our best. Applying the lessons of the masters, or even debating these lessons, puts us on a path towards learning and greater success.  


Related Posts:

1. Maximize Your Gains, Not Wins. William Eckhardt Interview.

2. What I Learned Losing a Million Dollars: Interview with Brendan Moynihan.

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