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What 23 Pages of Paranoia Taught Me About TradingBy Brian Hunt, editor in chief, Stansberry & AssociatesMonday, November 9, 2009 "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
Tucked near the middle of the greatest book on trading ever produced are 23 pages of pure paranoia.
These 23 pages center on a guy who sees trouble around every corner... a guy obsessed with risk... a guy probably worth over $3 billion... a guy who correctly called the 1987 stock market crash, made over $80 million in the process, and will go down as one of the greatest trading minds of all time.
Pages 117 through 139 of Market Wizards contain an interview with legendary trader Paul Tudor Jones.
For many years, Jones was the picture of the Wall Street big shot. He owned an enormous Chesapeake Bay mansion. He took skiing trips to Switzerland. He married a fashion model. To this day, Jones controls one of the largest hedge funds in the world.
He became so successful because of the idea behind the quote above – the idea that playing great defense is the key to succeeding in the markets. He became so successful by focusing on not losing money... His billions came as a result.
Reading Jones' interview will take you less than 10 minutes... and it might be the greatest "time put in versus value received" proposition an investor or trader will ever get. You'll find that for a guy associated with "winning" so much money, Jones constantly talks about losing... he constantly talks about playing great defense.
There's a comment on defense on nearly every page. In addition to his quote above, he says:
· Don't focus on making money. Focus on protecting what you have.
· I know that to be successful [in trading], I have to be frightened.
· I am always thinking about losing money as opposed to making money.
· Risk control is the most important thing in trading.
· Never play macho man with the market.
Like all great traders, Jones sees his No. 1 job as cutting risk to the bone. You can cut your own risk by always using protective stop losses and intelligent position sizing.
Bottom line: Keep your losses small and your winners large. And never put more than 1% or 2% of your account at risk on a given trade. An amateur trader will often risk 5% to 10% of his account on a trade, which eventually leads to disaster.
I often hear: "I'm thinking about getting into trading, what should I know?" I always reply: "Most people lose in the stock market. It's an incredibly hostile place, where you're going toe-to-toe with the world's smartest people."
I also encourage them to buy Market Wizards and read Jones' interview many times. Repeating his "defense" lines over and over is about the best "daily affirmation" a trader or investor will find.
Playing great defense. Winning by not losing. It's the system Paul Tudor Jones used to become a billionaire... and it's the second most important factor in your trading success.
Next Monday, I'll conclude our weekly series – The 10 Greatest Things Ever Said About Trading – with the single most important factor.
Good trading,
Brian Hunt
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