What 23 Pages of Paranoia Taught Me About Trading

What 23 Pages of Paranoia Taught Me About Trading
By Brian Hunt, editor in chief, Stansberry Research
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.

The Headline All Great Traders Hunt For

How Rich Traders Stay Rich

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

Today's entertainment: Congress approves $500 billion for stupid new monument
Nancy Pelosi loves it.

America's No. 1 newspaper BLASTS health care plan... again!
Another "must read" on the dishonest bill.

The only "green" energy that's actually profitable
Don't even think about investing in wind or solar stocks before reading this...

•	Gold-mining fund GDX rallies 10% last week... approaches 12-month high.
•	MasterCard joins Visa and American Express at new highs... all three up 50% or more this year.
•	Grain and mineral prices jump... heavy-machinery maker Bucyrus hits a 52-week high.
•	Earnings today... Tesoro, Clear Channel, Silver Wheaton, Electronic Arts, Priceline, Dish Network.

	Last	Change	52-Wk
S&P 500	1097.91	+0.94%	+16.73%
Oil (USO)	40.76	+0.77%	-31.35%
Gold (GLD)	104.23	+1.02%	+35.00%
Silver (SLV)	14.44	+1.51%	+88.95%
U.S. Dollar	75.28	-0.01%	-9.39%
Euro	1.50	+0.11%	+12.20%
VIX	21.49	+0.28%	-69.44%
HUI	448.69	+0.60%	+120.38%
10-Year Yield	3.40%	-0.02	-0.47

Advertisement

Company	Sym	Industry
MasterCard	MA	credit cards
McKesson	MCK	hospital supplies
Cooper	CBE	conglomerate
Eldorado Gold	EGO	gold mining
Bucyrus	BUCY	machinery
Valeant Pharma	VRX	pharma
TAM	TAM	airlines
Nu Skin	NUS	personal products
Amazon	AMZN	online shopping
DIRECTV	DTV	satellite TV
Vivo Parti	VIV	wireless telecom
Randgold	GOLD	gold mining
Virgin Media	VMED	TV programming
Perrigo	PRGO	drug products
iShares Gold	IAU	gold fund
Hanesbrands	HBI	clothing
Diageo	DEO	liquor
Dominion	D	utilities
Shire	SHPGY	pharma
Harris	HRS	telecom
NET Servicos	NETC	TV programming
Mettler-Toledo	MTD	medical devices
Armstrong	AWI	flooring
Mercadolibre	MELI	online auctions
American Express	AXP	credit cards
Travelers	TRV	insurance
Centurytel	CTL	telecom
IAMGOLD	IAG	gold mining
LAN Airlines	LFL	airlines
Transatlantic	TRH	insurance
Herbalife	HLF	health products
Domtar	UFS	paper products
Barrick Gold	ABX	gold mining
ADP	ADP	payroll
Estee Lauder	EL	make-up
Waters	WAT	technical devices
Edwards	EW	medical devices
Bio-Rad Labs	BIO	technical devices
Vistaprint	VPRT	online printing
Thomas & Betts	TNB	electrical equip
Colgate-Palmolive	CL	personal products
Allergan	AGN	pharma
Yanzhou Coal	YZC	coal mining
Ternium	TX	steel
Global Payments	GPN	money transfers
King Pharma	KG	pharma
Cervecerias Uni	CCU	beer
Health Net	HNT	insurance
SPDR Gold	GLD	gold fund
Liberty Ent	LMDIA	TV programming

Company	Sym	Industry
Pacific Capital	PCBC	bank
A123 Systems	AONE	electrical equip
US Concrete	RMIX	cement
Luminex	LMNX	medical devices
Leap Wireless	LEAP	wireless telecom
Rosetta Stone	RST	language software
Chemspec	CPC	chemicals
Lightbridge	LTBR	synthetics

Weekend Edition: All the Hallmarks of a Disaster in the Making
November 7, 2009

One Simple Strategy for 3,000% Gains
November 6, 2009

The Stupidest Government Program Ever
November 5, 2009

Commodity Q&A: This Commodity Is a WAY Better Buy Than Natural Gas
November 4, 2009

The Scariest Thing on Wall Street
November 3, 2009