Friday, April 19, 2013

Paul Tudor Jones: An Astute Market Forecaster


“Too many investors have no patience and discipline. These two personality traits
are imperative for investment success.” – Andrew Abraham

Born in September 28, 1954, Paul Tudor Jones is an astute market forecaster and a highly profitable trader. Paul obtained a degree in economics from University of Virginia in 1976, after which he began working on a trading floor (being a broker for E.F. Hutton). He was admitted to Harvard Business School and was ready to go, but he changed his mind abruptly, because of a reason mentioned later in this article. Paul was employed and tutored by Eli Tullis, who was a commodity broker.  He learned valuable trading tips from Eli Tullis. In the year 1980, Paul started Tudor Investment Corporation, a firm that is now a major asset management firm headquartered in Greenwich, Connecticut.

Paul Tudor Jones would always be remembered for his accurate prediction of the bear market that occurred in the year 1987 (Black Monday). He’d gone short and trebled his funds on that crash. As a result of this, a video which features that unique prediction was made. The video is in a great demand and expensive, because it’s scarce. As of June 2007, Paul’s hedge fund traded on 17,700,000,000 dollars.  The formal rule for the hedge funds industry is 2% management fee and 20% of the accumulated gains, but Paul charges 4% management fee and 23% of the accumulated gains. His net worth is roughly 3,400,000,000 dollars, and was thus named the 336th wealthiest person in the world (107th wealthiest in USA) in the year 2012. He’s been involved in various philanthropic activities.

Here are some of the lessons you can learn from Paul Tudor Jones:

  1. You can’t learn the secrets of successful trading at college/university. The principles that guarantee lasting success in the markets aren’t what can be gotten thru formal education. When Paul was admitted to Harvard Business School, he packed to go, but soon changed his mind. He thought the idea was useless, since the school wasn’t going to teach him what he really needed as an aspiring trader. The real skill of trading isn’t what is taught at a business school. The real trading skills can be gotten from your personal approach to the markets, profitable trading mentors with good teaching talent, and years of experience. There’s no way around this fact. Paul’s mentor was Eli Tullis.

  1. Your success, if unusual, would make you a sought-after expert. Paul charges 4% management fees, whereas the industry standards specify 2%. Paul charges 23% performance fees, but the industry standards specify 20%. Because of Paul’s excellent track records, his clients bend to his conditions and wishes. You’ve got to try your best to be successful. If you do, people would be inclined to accept your terms and conditions. Otherwise, lack of success will force you to accept unfavorable terms and conditions, especially if you’re desperate and have no choice.

  1. Paul believes that the whole world is simply nothing more than a flow chart for capital. Because of this you should always get prepared to take advantage of great trading opportunities in the markets. These opportunities would cause swing movements in the markets – which are potential turning points at important price levels.

  1. Being an effective market forecaster doesn’t mean you’ll always be right. Paul says: “Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you’re very good. The second you do, you’re dead.” By making a correct prediction, you’re not an infallible trader. Likewise, by making a wrong prediction, you’re not an ineffectual trader. Paul assumes each of his order might go wrong (though he’s an overall winner). When you see each trade as a potential loser, you’ll not use excessively big position sizes, and you’ll be quick to exit a loser at a predetermined exit point. People tend to risk a high percentage of their portfolios because they think a trade ‘must’ go in their direction. This idea doesn’t pay.

  1. Don’t dwell too much on your past errors. Simply move ahead and think of the next trading opportunities that will soon come your way. Because of frigidity that arises from recent losing trades, many people can’t take advantage of next signals they see and thus lose the opportunities to make serious gains and recover some/all of their losses. Paul isn’t disturbed by the mistakes he made a few seconds ago, he’s only concerned about the new trading opportunities that will come his way.

  1. Paul likes to speculate around some bends in the end of market biases. While trend-following is a good trading approach, one should note where one major trend ends and where another begins. For strongly trending instruments, one would do well to look for confirmation of a change in the major outlook before one assumes the opposite direction.

  1. You can increase you lot sizes when your account is increasing, but you need to decrease your lot sizes when the account is decreasing. This ensures that you make bigger profits during winning streaks and smaller losses during losing streaks. I’ve personally tried this approach: it works like magic. Paul says it’s better to play great defense, not great offence. Use stops to limit losses (in whatever forms they come). Paul uses mental stops, and he’s disciplined enough to respect them no matter what. You got to smooth a negative order if it makes you increasingly uneasy. If you’ve some difficulty with self-discipline, then you can use physical stops and stick to them.

Conclusion: Many people desire trading breakthrough but aren’t prepared to apply the right trading principles. It isn’t bad to start small, but it’s bad to remain small. For you to be a top trader, you’ve to apply relevant trading principles.

This piece is ended with a quote from Paul:

"Trading is very competitive and you have to be able to handle getting your butt kicked… At the end of the day, the most important thing is how good you are at risk control."

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