Market Wizard Paul Tudor Jones

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“Don’t ever average losers.”

“Never trade in situations where you don’t have control.”

“If you have a losing position that is making you uncomfortable, the solution is very simple, Get out”

“Don’t be too concerned about where you got into a position.”

“The most important rule of trading is to play great defense, not great offense.”

“Every day I assume every position I have is wrong.”

“Don’t have an ego. Always question yourself and your ability.”

 

These were some of Paul Tudor Jones’s responses when Jack Schwager asked him what trading rules he lives by in their Market Wizards interview. While most of these rules are simple common sense to anyone who has been following Investors Business Daily for any amount of time, I took particular interest in the way Jones rattled them off almost rapid fire style. He made it very clear that these rules were on the tip of his tongue well before the question was even asked. He made it clear that these are the rules he truly lives by.

The first rule, “Don’t ever average losers,” should be a non-issue for everyone. If you don’t understand why, re-read How To Make Money In Stocks.

The second rule starts to get a little deeper. Jones elaborates by saying that he never places trades before key reports come out because that would just be gambling. This is a mistake I see many young investors making. Holding through earnings reports have hurt me at least twice this year. We need to be on the defensive around these key reports.

Getting out of a position that makes you uncomfortable is tricky because you fear that the big bounce you’re hoping for will come right after you cash out. There are two problems here. First, you shouldn’t hope for anything. Second, what a stock does after you get out shouldn’t affect your judgement.

The next rule is about playing great defense. This is something that just about every investor needs to work on. We must always be on guard against trading too much, too big, or too aggressive. I have fallen prey to each of these at various times and used a whole list of excuses as reasons why. The bottom line is that capital preservation has to be priority number one.

The last two rules go hand in hand with each other. In order to assume that every position that you have is wrong every day, you can’t have an ego. I have seen a number of young traders read a few articles on a company and become convinced that it will move a certain direction. They then proceed to hold with conviction without ever considering that they might be wrong. This will prevent them from being able to take quick losses and preserve capital.

As you can see, most of Jones’ rules and much of his interview centered around risk control. We must work tirelessly to ensure that we are never over-exposed.