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Jasper Lawler Market Strategist, CMT
Analysis, Thoughts & Insights | September 21, 2022

Paul Tudor Jones: Trading Psychology – Key to Markets

Paul Tudor Jones: The Trader Who Best Understands Trading Psychology

Paul Tudor Jones, the legendary trader who made millions on the Black Monday market crash of 1987 has a unique take on trading psychology that helped give him his edge.

We continue our series on the masters of trading with Paul Tudor Jones. He’s a ‘trader’s trader’ known for his bold moves and contrarian viewpoint. Tudor Jones cultivated a trading psychology suited to his high-risk style from his earliest days trading cotton in New York.

Contents: Paul Tudor Jones

• Who is Paul Tudor Jones?
• Paul Tudor Jones’ background
• Paul Tudor Jones: Best Trades
• Paul Tudor Jones trading strategy
• Tudor Jones psychology
• Trading advice by Paul Tudor Jones

Who is Paul Tudor Jones?

Paul Tudor Jones is a legendary hedge fund trader, made famous by predicting (and making a lot of money from) the October 1987 crash. He was one of the featured traders in the original ‘Market Wizards’ book by Jack Schwager.

Paul Tudor Jones net worth = $7.3 billion (Forbes, Oct 2021)

A Paul Tudor Jones documentary called ‘Trader’ is a must-watch for any aspiring trader. It features Tudor Jones in his heyday, trading commodities and forex markets at home before the days of the internet. There are numerous lessons for traders, its entertaining and motivational.

Paul Tudor Jones is also one of the featured traders (alongside Warren Buffett, Ray Dalio, Carl Icahn and others) in Tony Robbin’s bestselling book ‘Money Master the Game: 7 Steps to Financial Freedom’.

Paul Tudor Jones’ background

Tudor Jones first started trading cotton futures on the trading floor at the New York Cotton Exchange under his head trader and mentor Eli Tullis.

Tullis was one of the best-known cotton traders of his time and Tudor Jones has since heralded the things he learned under his mentor as a large contributor towards his later success. Years later in 1980, Paul Tudor Jones founded Tudor Investment Corporation, which now has a reported $9 billion in assets under management (AUM).

NOTE: Finding a trading mentor is one of the best ways to short-cut some of the steep learning curve and psychological hurdles in trading. The idea of ‘learning from the masters’ is what inspired this series of articles. However, there is no straightforward route to doing this and unfortunately good traders are busy trading and those offering lessons in trading often don’t trade themselves.

Paul Tudor Jones: Best Trades

The trade that Paul Tudor Jones is best known for is when he made a reported $100 million in trading profits, tripling his money from Black Monday in 1987 because he sold heavily on the Friday before.

He credited his partner Peter Borish for discovering the trade. Borish had mapped the 1987 price action in the Dow Jones Industrial Average stock index against the index’s performance before the 1929 crash and noticed the strong similarities. They say history doesn’t repeat itself, but it rhymes!

Unlike George Soros who misread the crash but was correct to be long the market that year, Tudor Jones sold before the crash and then bought the market after it crashed and made money on the way back up too. He apparently used the price crossing back over the 200-day moving average to determine that the trend had turned back up, a market timing tool that’s still very popular with forex traders today.

Paul Tudor Jones trading strategy

Paul Tudor Jones is a discretionary trader, meaning he takes his trading decisions without the help of computers or algorithms. He has described himself as a technical trader who ‘reads the tape’ but he layers a fundamental thesis on top of what the market is telling him via the price. Paul Tudor Jones is not a trend follower by nature. His approach was to buy after weakness and sell after strength, in essence trying to pick bottoms and tops.

“I believe the best Money is at the market turns, Everyone says you get killed trying to pick tops and bottoms-Well for 12 years, I have missed the meat in the middle, but I have made lot of money at tops and bottoms”.

Tudor jones does not specialise in one market but rather takes a ‘macro’ approach moving between assets like currencies, commodities, and bonds – mostly in the futures markets. Futures markets tend to be some of the most volatile and are most prone to shifts in short-term sentiment. Tudor Jones’ keen understanding of market psychology helped in this respect.

NOTE: Tudor Jones’s hedge fund grew big enough over time that he hired fund managers with different trading styles. The investment strategies of the Tudor Group by 2021 include:

• Discretionary global macro
• Quantitative global macro (managed futures)
• Discretionary equity long/short
• Quantitative equity market neutral
• Growth equity

Tudor Jones specialises in finding asymmetrical opportunities, meaning he looks to earn high returns relative to the risk he is taking. Forex traders will know this as the risk: reward ratio. Tudor Jones has said he will target trades with a 5:1 risk: reward. He jokingly said that he can be wrong 80% of the time and still make money- but this is harder than it sounds…

Tudor Jones psychology

Losing more trades you win is a psychological challenge to overcome – and requires a uniquely tough mindset.

For most of us, even if you know the trading systems says you will win more from your few winners than you will lose from your many losers, it takes mental toughness to always be losing trades and to keep trading.

This probably goes a long way to explain why Tudor Jones puts such an emphasis on his own trading psychology – and why he is one of the few top professional money managers that can consistently take these kinds of risks and come out on top.

Rumour has it that Paul Tudor Jones paid the famous self-help guru Tony Robbins over $1 million per year to manage his mindset. He also employed one of the heroes of trading psychology Brett Steenbarger (mentioned in our top trading psychology books article) from 2010 through 2014 as ‘Director of trader development’ at his hedge fund, Tudor Investment Corp.

Paul Tudor Jones has credited his mentor Eli Tullis for showing him how to pull off his bold style of trading and contrarian approach with calmness in the face of adverse market-moves.

Even for those of us that didn’t have a mentor, many of the important lessons that lead to eventual trading success come from the hard (sometimes heart-breaking!) losses experienced in the early days. Above all else it should teach you to respect risk and to respect the ability of the market to do what it chooses, no matter what you expected.

Trading advice by Paul Tudor Jones

Tudor Jones is known for his ‘pearls of wisdom’. Here are some that we think best serve your trading psychology and risk management – probably the two most overlooked areas of trading by new traders.

“Trading is very competitive, and you have to be able to handle getting your butt kicked.”

Here he is saying in a very ‘matter of fact’ style that traders need to be able to emotionally handle trading losses – a point we have been labouring across our series on trading psychology.

The most important rule of trading is to play great defence, not great offence. Every day I assume every position I have is wrong. Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.

Every sentence of this quote has its own lesson for trading, so we’ll go one by one. By talking about defence, Tudor Jones is emphasising the importance of risk management. Controlling your downside to limit the chance of any catastrophe means you will be in a good position to benefit from the big winners.

If you assume every position is wrong, you take your ego and pride out of the equation and you will never ‘be a hero’ and take that all or nothing trade that could leave you with nothing.

Jones then flips it around from controlling losses to the trading psychology aspect of winning and temptation to ‘feel you are very good’. Trading is about putting the odds in your favour. If you know that you’ll never assume a winning streak means you’re invincible because you know it will always be followed by some losing trades.

“If you make a good trade, don’t think it is because you have some uncanny foresight. Always maintain your sense of confidence but keep it in check.”

A bad trade that throws away the profits of several good trades can be one of the most difficult trading experiences. The point here is to balance confidence and pride- you must take the opportunities but take them with all necessary precautions and in keeping with your trading strategy.

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