The third trader in this top trader spotlight mini-series is Paul Tudor Jones II (born September 1954). Jones is the founder of Tudor Investment corporation, which is a private asset management company and hedge fund. Paul Tudor Jones II made fame predicting the crash of 1987. Where for most investors October 1987 was a devastating month, the Tudor Futures Fund registered an incredible 62% return. With his unique trading style and uncorrelated performance with other money managers, combined with give consecutive triple-digit return years with very low equity retracements, makes it that Jones well deserved his spot in this series. As of March 2014, Forbes Magazine estimated his net worth of US$4.3 billion, ranking him as the 108th richest American.
Jones grew up in Memphis, Tennessee. After high school Jones went to the University of Virginia, earning an undergraduate degree in economics. In college Jones did read an article on famous trader Richard Dennis which made a big impression on him. Reading about Richard Dennis made Jones think that trading must be the greatest job in the world. After finishing college in 1976, Jones got introduced to Eli Tullis by his uncle, who was a successful cotton trader. Eli Tullis lived in New Orleans and was very famous when it came to trading cotton. He offered Jones a job on the floor of the New York Cotton Exchange. After working as a floor clerk in New York for six months he returned to New Orleans to work for Eli.
What impressed Jones was the emotional control of Tullis. In his interview with Market Wizards stating that “He was the toughest son of a bitch I ever knew”. From his mentor he learned that trading is very competitive and you have to be able to get your butt kicked. To be successful you need to learn controlling the emotional ups and downs that are involved.
In 1980 Jones went back to the New York Cotton Exchange to work as in independent floor trader. This was a successful period, making him millions during the three and a half years he worked as a floor trader. What was particularly impressive was that during this period he witnessed only one losing month. Eventually he quit his job in 1984, partially out of boredom and partially fear of eventually losing his voice.
After the successful period as a floor trader a new business venture of money management was started. In September 1984 Paul Tudor Jones launched the Tudor Futures Fund. Starting of with only $1.5 million under management, at the end of October 1988 the total amount of money managed had grown to $330 million.
His characteristics as a trader
The importance of discipline and money management came at a high price for Jones. Making one massive overtrade position that went against his favor, made him lose about 60-70% of equity value. This made him question if he was cut out for this trading business, and almost made him quit trading. Eventually he got his emotional game back together and changed his trading style from that moment on. He would cut his losers short, and stayed with his winning traders.
Another important trading idea that Tullis taught Jones was the importance of time. In trading Jones doesn’t only have a price stop, but also a time stop. When you have the idea that a market should break, but it doesn’t, Jones would get out even if he is not losing any money. When a move was supposed to happen but the market isn’t doing anything, this is often a signal as well.
On the question what makes him a very successful trader, he states that he sees it as his strength that he is able to view anything that has happened up to the present point in time as history. He doesn’t care about a trading mistake made a few seconds ago, but only cares about what he will do from the next moment on. His is something we see with many top traders, fully accepting that mistakes are made with trading and don’t let that influence future decisions. Jones tries to avoid getting emotionally attached with the market.
As a trader famous for being a bit contrarian, he pays a lot of attention to the Elloitt Wave Theory. According to Jones, the Elloitt Wave theory allows him to create incredibly favorable risk/reward opportunities. He therefore, attributes a lot of his success to the Elloitt Wave approach.
Tips for traders
Five tips Paul Tudor Jones has for traders to become as better trader:
#1: When you have a losing position that makes you feel uncomfortable: get out. The idea behind this is simple, because you can always get back in. But helps you look back at your trade with a clear mind.
#2: Don’t trade in situations where you don’t have control. An example is the release of key reports. Taking significant positions around such events is gambling not trading.
#3: Focus on protecting money, not making it.
#4: Never average your losers. Some traders do this to compensate for a move against them earlier. According to Jones you should decrease your trading size when you are trading poorly. And increase trading size when you’re trading well.
#5: Lastly: Don’t let your ego get in the way. Always question your ability as a trader. The moment you feel that you are very good, you are dead.
Market Wizards Interviews with top traders – Jack D. Schwager