Paul Tudor Jones-The Art of Aggressive Trading

October 1987 was a devastating month for most investors as the world stock markets witnessed a
collapse that rivaled 1929. That same month, the Tudor Futures Fund, managed by Paul Tudor
Jones, registered an incredible 62 percent return. Jones has always been a maverick trader. His
trading style is unique and his performance is uncorrelated with other money managers. Perhaps
most important, he has done what many thought impossible: combine five consecutive, triple-digit
return years with very low equity retracements. (I am fudging slightly; in 1986, Paul's fund realized
only a 99.2 percent gain!)
Jones has succeeded in every major venture he has tried. He started out in the business as a broker
and in his second year grossed over $1 million in commissions. In fall 1980, Jones went to the New
York Cotton Exchange as an independent floor trader. Again he was spectacularly successful,
making millions during the next few years. His really impressive achievement though was not the
magnitude of his winnings, but the consistency of his performance: During his three and a half
years as a floor trader, he witnessed only one losing month.
In 1984, partially out of boredom, and partially out of fear of eventually losing his voice—an
occupational hazard for a pit trader— Jones again abandoned his successful career for a new
venture: money management. He launched the Tudor Futures Fund in September 1984 with $1.5
million under management. At the end of October 1988, each $1,000 invested in this fund was
worth $17,482, while the total amount of money he managed had grown to $330 million. In fact,
the amount under management would have been higher, but Jones stopped accepting new
investment funds in October 1987 and has also made cash disbursements since that time.
If one believes in cycles—as Jones does—it appears that he is due for another career change. It is
hard to imagine what he can do for an encore.
Jones is a compendium of contrasts. In private conversation he is relaxed, but as a trader he shouts
his orders with the ferocity of a drill sergeant. His public image is one of a swaggering, egotistical
trader, but one-on-one he is easygoing and unassuming. The media usually dramatizes the
flamboyant elements of his lifestyle—Chesapeake Bay Mansion, private 3,000-acre wildlife
preserve, beautiful women, fine restaurants—but he has also made helping the poor a second
avocation.
Jones has emulated New York businessman Eugene Lang by setting up a fund to finance the
college education of eighty-five elementary school graduates in Brooklyn's economically depressed
Bedford-Stuyvesant section. This is not merely a matter of donating money; Jones has become
personally involved by meeting with his adopted students weekly. More recently, he started the
Robin Hood Foundation, whose endowment has grown to $5 million. This organization, true to its
name, raises money from the rich and distributes it to private groups and individuals working to aid
the poor.
Jones had arranged our interview for 3:15 P.M., a time by which all the futures markets are closed,
except for the stock indexes. Even with only one market trading, I was a little concerned about the
practicality of starting the interview at that time, since I knew that the S&P stock index futures
contract was one of Jones' primary trading vehicles. In fact, when I arrived he was in the midst of
trading the S&P.
I waited until he finished shouting orders over the speakerphone and explained that I did not want
to interrupt his trading. "Maybe we should delay the interview until the market closes," I suggested.
"No problem," he answered, "let's go."
As it turned out, Jones was not merely trading the S&P that afternoon, he was building up a major
position in anticipation of a huge break in the stock market. There is an intensity in Jones'
placement of an order that is reminiscent of a tennis player aggressively returning a volley. ("Buy
300 at even! Go, go, go! Are we in? Speak to me!") Yet, he shifted easily between trading and our
conversation.
Jones speaks with admiration about his first tutor in the business, the legendary cotton trader, Eli
Tullis. Perhaps the one trait of Tullis that made the greatest impression on Jones was his steel-hard
emotional control. He recalls how Tullis could carry on a polite, relaxed conversation with visitors,
without blinking an eye, at the same time his positions were getting decimated in the market.

Jones' casualness in seeing visitors, talking to his staff, and participating in this interview at the
same time he was trading a heavy S&P position reflected the same trait. A rally in stock index
futures in the closing minutes of trading that day caused over a $ 1 million loss in Jones' position.
Yet, he was so composed that I didn't realize the market had moved against him until I checked the
closing prices later that day.
There was insufficient time to complete the interview at our first meeting. I returned about two
weeks later. Two things were notable about this second meeting. First, whereas he had been
strongly bearish and heavily short the stock market at the time of our first conversation, Jones'
short-term opinion on the stock market had shifted to bullish in the interim. The failure of the stock
market to follow through on the downside at the price and time he had anticipated convinced him
that the market was headed higher for the short term.
"This market is sold out," he emphasized at our second meeting. This 180-degree shift in opinion
within a short time span exemplified the extreme flexibility that underlies Jones' trading success.
He not only quickly abandoned his original position, but was willing to join the other side once the
evidence indicated his initial projection was wrong. (Yes, his change of heart proved well timed.)
Second, Jones had suddenly adopted a very cautious tone regarding projections p Ttaining to the
stock market and the economy. He was concerned that a second major selling wave in the stock
market—the first being October 1987—could lead to a type of financial Mc-Carthyism. Indeed,
there is historical precedence for such concern: During the Senate hearings held in the 1930s,
committee members were so desperate to find villains responsible for the 1929 stock crash that they
dragged up New York Stock Exchange officials who had held long positions during the price
collapse.
Jones feared that, as a prominent speculator and forecaster of economic trends, he might make a
convenient target for any future governmental witch-hunts. Jones had been particularly rattled by a
call from a prominent government official regarding his trading. "You wouldn't believe how highplaced
this person was," he explained to me in a voice tinged with incredulity, taking particular
care not to divulge anything specific.
Although Jones remained friendly, the directness of the first interview was replaced by an almost
prerecorded quality in his replies. For example, a question about trading strategy was met with a
response about frmit-running^-an illegal practice in which a broker places his own order
m^ront~oralarge customer order. This reply virtually bordered on the absurd since Jones handles no
customer orders. It made as much sense as a football fan, who bets in his office pool, denying that
he took a bribe to throw the game. It sounded as if Jones was using the interview as a forum for
making an official statement, perhaps to be used as evidence in some hypothetical future
congressional hearing. I thought that Jones was being overly cautious—if not paranoid—but then
again, the expectation that a true economic crisis would lead to "killing the messengers of bad
news" does not really seem that far-fetched.
When did you first get interested in trading?
When I was in college I read an article on Richard Dennis, which made a big impression on me. I
thought that Dennis had the greatest job in the world. I already had an appreciation for trading
because my uncle, Billy Dunavant, was a very successful cotton trader. In 1976, after I finished
college, I went to my uncle and asked him if he could help me get started as a trader. He sent me to
Eli Tullis, a famous cotton trader, who lived in New Orleans. "Eli is the best trader I know," he told
me. I went down to see Eli and he offered me a job on the floor of the New York Cotton Exchange.
How come you went to work for Eli instead of your uncle?
Because my uncle was primarily involved in the cash side of the business, merchandising cotton. I
was interested in becoming a trader straightaway.
How long did you work on the floor of the exchange? What was your job there?
I was a floor clerk; that is how everybody begins. But I also did a lot of analytical work, watching
the market to try to figure out what made it tick. I clerked in New York for about six months and
then returned to New Orleans to work for Eli.
Did you learn a lot about trading from Eli?

Absolutely. Working with Eli was a fabulous experience. He would trade position sizes of 3,000
contracts when the entire market open interest was only 30,000. He would trade more volume than
any cotton trader off the floor. He was a true sight to behold.
Was he trading futures against cash or just speculating?
He was a pure speculator. The amazing thing was that since he used his own broker on the floor,
everyone always knew exactly what his position was. He was very easy to tag. Eli's attitude was,
"The hell with it, I'm going to take them head on."
So everyone knew his hand?
Definitely.
But, apparently, it didn't hurt him?
No.
Is that an exception? Do you try to hide your positions?
I try. But, realistically, the guys in the pit who have been there for five or ten years know it is me.
Everyone knows when I trade. The one thing I learned from Eli is that, ultimately, the market is
going to go where it is going to go.
So you don't think it is important to hide your positions?
I think it is important to make an effort. For instance, my orders used to be particularly easy to read
because I traded in multiples of 300 contracts. Now I break my orders up; I might give one broker
an order for 116 and another broker an order for 184.1 have at least four brokers in every pit.
What else did you learn from Tullis?
He was the toughest son of a bitch I ever knew. He taught me that trading is very competitive and
you have to be able to handle getting your butt kicked. No matter how you cut it, there are
enormous emotional ups and downs involved.
That sounds like a general character-building lesson. What about specifics regarding
trading?
Tullis taught me about moving volume. When you are trading size, you have to get out when the
market lets you out, not when you want to get out. He taught me that if you want to move a large
position, you don't wait until the market is in new high or low ground because very little volume
may trade there if it is a turning point.
One thing I learned as a floor trader was that if, for example, the old high was at 56.80, there are
probably going to be a lot of buy stops at 56.85. If the market is trading 70 aid, 75 offered, the
whole trading ring has a vested interest in buying the market, touching off those stops, and
liquidating into the stops—that is a very common ring practice. As an upstairs trader, I put that
together with what Eli taught me. If I want to cover a position in that type of situation, I will
liquidate half at 75, so that I won't have to worry about getting out of the entire position at the point
where the stops are being hit. I will always liquidate half my position below new highs or lows and
the remaining half beyond that point.
Any other lessons you can attribute to Tullis?
By watching Eli, I learned that even though markets look their very best when they are setting new
highs, that is often the best time to sell. He instilled in me the idea that, to some extent, to be a good
trader, you have to be a contrarian.
You have done tens of thousands of trades. Is there any single trade that stands out?
Yes, the 1979 cotton market. One leams the most from mistakes, not successes. I was a broker back
then. We had lots of speculative accounts and I was long about 400 contracts of July cotton. The
market had been trading in a range between 82 and 86 cents, and I was buying it every time it came
down to the low end of that range.
One day, the market broke to new lows, took out the stops, and immediately rebounded about 30 or
40 points. I thought the reason the market had been acting so poorly was because of the price
vulnerability implied by the proximity of those well-known stops. Now that the stops had been
touched off, I thought the market was ready to rally.

I was standing outside the ring at the time. In an act of bravado, I told my floor broker to bid 82.90
for 100 July, which at the time was a very big order. He bid 90 for 100, and I remember the Refco
broker came running across the pit screaming, "Sold!" Refco owned most of the certificated stock
at that time [the type of cotton available for delivery against the contract]. In an instant I realized
that they intended to deliver against the July contract, which then was trading at about a 4-cent
premium to the October contract. It also dawned on me that the whole congestion pattern that had
formed between 82 and 86 cents was going to be a market measurement for the next move down
[the break from 82 cents was going to equal the width of the prior 4-cent trading range].
So you knew you were wrong immediately?
I saw immediately that the market was going straight down to 78 cents, and that it was my blood
that was going to carry it there. I had come in long 400 contracts, entered another 100 as a day
trade, and a final 100 on that macho-type bid that I should never have made.
So you realized instantly that you wanted to be out.
No, I realized instantly that I wanted to be short.
How fast did you react?
Almost immediately. When the Refco broker shouted, "Sold," everyone in the ring turned around
and looked at me, because they knew what I was trying to do. The guy standing next to me said, "If
you want to go to the bathroom, do it right here." He said I looked three shades of white. I
remember turning around, walking out, getting a drink of water, and then telling my broker to sell
as much as he could. The market was limit-down in sixty seconds, and I was only able to sell 220
contracts.
When did you get out of the rest of your position?
The next morning the market opened 100 points lower and I started selling from the opening bell. I
sold only about 150 contracts before the market locked limit-down again. By the time it was all
over, I ended up selling some contracts as much as 4 cents below the point I first knew the position
was no good.
Even though you reacted fairly quickly, you still took a big hit. In retrospect, what should you
have done?
First of all, never play macho man with the market. Second, never overtrade. My major problem
was not the number of points I lost on the trade, but that I was trading far too many contracts
relative to the equity in the accounts that I handled. My accounts lost something like 60 to 70
percent of their equity in that single trade.
Did that particular trade change your whole trading style in terms of risk?
Absolutely. I was totally demoralized. I said, "I am not cut out for this business; I don't think I can
hack it much longer." I was so depressed that I nearly quit.
How many years had you been in the business at that time?
Only about three and a half years.
Had you been successful up to that point?
Relatively. Most of my clients had made money, and I was an important producer for my company.
How about someone who had given you $10,000 at the beginning of the three-year period?
They were probably up about threefold.
So everyone who was with you for a long time was still ahead of the game?
Yes, but I had to suffer some intense drawdowns during the interim. That cotton trade was almost
the deal-breaker for me. It was at that point that I said, "Mr. Stupid, why risk everything on one
trade? Why not make your life a pursuit of happiness rather than pain?"
That was when I first decided I had to learn discipline and money management. It was a cathartic
experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and
decided that I was not going to quit. I was determined to come back and fight. I decided that I was
going to become very disciplined and businesslike about my trading.

Did your trading style change radically from that point on?
Yes. Now I spend my day trying to make myself as happy and relaxed as I can be. If I have
positions going against me, I get right out; if they are going forme, I keep them.
I guess you not only started trading smaller, but also quicker?
Quicker and more defensive. I am always thinking about losing money as opposed to making
money. Back then, in that cotton trade, I had a vision of July going to 89 cents and I thought about
all the money I was going to make on 400 contracts. I didn't think about what I could lose.
Do you always know where you are getting out before you put a trade on?
I have a mental stop. If it hits that number, I am out no matter what. How much do you risk on any
single trade?
I don't break it down trade by trade. All the trades I have on are interrelated. I look at it in terms of
what my equity is each morning. My goal is to finish each day with more than I started. Tomorrow
morning I will not walk in and say, "I am short the S&P from 264 and it closed at 257 yesterday;
therefore, I can stand a rally." I always think of it in terms of being short from the previous night's
close.
Risk control is the most important thing in trading. For example, right now I am down about 6'/2
percent for the топшТТНауе а З'б percent stop on my equity for the rest of the month. I want to
make sure that I never have a double-digit loss in any month.
One aspect of your trading style is a contrarian attempt to buy and sell turning points. Let's
say you are looking for a top and go short with a close stop when the market reaches a new
high. You then get stopped out. On a single trade idea, how many times will you try to pick a
turning point before you give up?
Until I change my mind, fundamentally. Otherwise, I will keep cutting my position size down as I
have losing trades. When I am trading poorly, I keep reducing my position size. That way, I will be
trading my smallest position size when my trading is worst.
What are the trading rules you live by?
Don't ever average losers. Decrease your trading volume when you are trading poorly; increase
your volume when you are trading well. Never trade in situations where you don't have control. For
example, I don't risk significant amounts of money in front of key reports, since that is gambling,
not trading.
If you have a losing position that is making you uncomfortable, the solution is very simple: Get out,
because you can always get back in. There is nothing better than a fresh start.
Don't be too concerned about where you got into a position. The only relevant question is whether
you are bullish or bearish on the position that day. Always think of your entry point as last night's
close. I can always tell a rookie trader because he will ask me, "Are you short or long?" Whether I
am long or short should have no bearing on his market opinion. Next he will ask (assuming I have
told him I am long), "Where are you long from?" Who cares where I am long from. That has no
relevance to whether the market environment is bullish or bearish right now, or to the risk/reward
balance of a long position at that moment.
The most important rale of trading is to play great defense, not great offense. Every day I assume
every position I have is wrong. I know where my stop risk points are going to be. I do that so I can
define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions
that are going in my direction. If they are going against me, then I have a game plan for getting out.
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.
Jesse Livermore, one of the greatest speculators of all time, reportedly said that, in the long ran,
you can't ever win trading markets. That was a devastating quote for someone like me, just getting
into the business. The idea that you can't beat the markets is a frightening prospect. That is why my
guiding philosophy is playing great defense. 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.
But you have been very successful for years. Aren't you more confident now than you were
before?
I am more scared now than I was at any point since I began trading, because I recognize how
ephemeral success can be in this business. I know that to be successful, I have to be frightened. My
biggest hits have always come after I have had a great period and I started to think that I knew
something.
My impression is that you often implement positions near market turns. Sometimes your
precision has been uncanny. What is it about your decision-making process that allows you to
get in so close to the turns?
I have very strong views of the long-ran direction of all markets. I also have a very short-term
horizon for pain. As a result, frequently, I may try repeated trades from the long side over a period
of weeks in a market which continues to move lower.
Is it a matter of doing a series of probes until you finally hit it?
Exactly. I consider myself a premier market opportunist. That means I develop an idea on the
market and pursue it from a very-low-risk standpoint until I have repeatedly been proven wrong, or
until I change my viewpoint.
In other words, it makes a better story to say, "Paul Jones buys the T-bond market 2 ticks
from the low," rather than, "On his fifth try, Paul Jones buys the T-bond market 2 ticks from
its low."
I think that is certainly part of it. The other part is that I have always been a swing trader, meaning
that I believe the very best money is to be made at the market turns. Everyone says you get killed
trying to pick tops and bottoms and you make all the money by catching the trends in the middle.
Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of
bottoms and tops.
If you are a trend follower trying to catch the profits in the middle of a move, you have to use very
wide stops. I'm not comfortable doing that. Also, markets trend only about 15 percent of the time;
the rest of the time they move sideways.
What is the most prominent fallacy in the public's perception about markets?
That markets can be manipulated. That there is some group on Wall Street that controls price action
in the markets. I can go into any market and create a stir for a day or two, maybe even a week. If I
go into a market at just the right moment, by giving it a little gas on the upside, I can create the
illusion of a bull market. But, unless the market is really sound, the second I stop buying, the price
is going to come right down. You can open the most beautiful Saks Fifth Avenue in Anchorage,
Alaska, with a wonderful summer menswear department, but unless somebody wants to buy the
clothes, you will go broke.
What other misconceptions do people have about the markets?
The idea that people affiliated with Wall Street know something. My mother is a classic example.
She watches "Wall Street Week" and she takes everything they say with almost a religious fervor. I
would bet that you could probably fade "Wall Street Week."
I know you talk to traders in virtually every major market on an almost daily basis. Are you
uncomfortable about being on the opposite side of the fence from these people?
Yes. Who wants to fade a winner? I want to be with them because I make a point of talking to the
people who have the best track records.
How do you keep all these other opinions from confusing your own vision? Let's say you are
bearish on a market and 75 percent of the people you talk to about that market are bullish. What
do you do?
I wait. I will give you a perfect example. Until last Wednesday, I had been bearish on crude oil,
while it was in the midst of a $2 advance. The best crude oil trader I know was bullish during that
period. Because he was bullish, I never went short. Then the market started to stall and one day he
said, "I think I am going to go flat here." I knew that instant— particularly, given the fact that
bullish news was coming out of OPEC right at that time—that crude oil was a low-risk short. I sold
the hell out of it, and it turned out to be a great trade.
Are there any market advisors that you pay attention to?

Marty Zweig and Ned Davis are great; Bob Prechter is the champion. Prechter is the best because
he is the ultimate market opportunist.
What do you mean by opportunist?
The reason he has been so successful is that the Elliott Wave theory allows one to create incredibly
favorable risk/reward opportunities. That is the same reason I attribute a lot of my own success to
the Elliott Wave approach.
Any advisor you consider underrated?
I think Ned Davis does the best research on the stock market that I have seen. Although he is well
known, I don't think he has received the recognition he deserves.
Any analysts you consider overrated?
Judge not, least you be judged.
Very few traders have reached your level of achievement. What makes you different?
I think one of my strengths is that I view anything that has happened up to the present point in time
as history. I really don't care about the mistake I made three seconds ago in the market. What I care
about is what I am going to do from the next moment on. I try to avoid any emotional attachment to
a market. I avoid letting my trading opinions be influenced by comments I may have made on the
record about a market.
No loyalty to positions is obviously an important element in your trading.
It is important because it gives you a wide open intellectual horizon to figure out what is really
happening. It allows you to come in with a completely clean slate in choosing the correct forecast
for that particular market.
Has the tremendous growth of the money you are managing made it more difficult to trade at
the same level of profitability?
It has made it tremendously more difficult.
Do you think you could make a substantially higher percentage return if you were trading
smaller amounts of money?
Without question.
Do you ever question whether the detrimental impact of size on your performance outweighs
profit incentive fees you earn from managing money?
I think about that question every day. It is going to be interesting to see what happens by the time
your book is published.
Have you stopped accepting new investment funds?
Yes, a long time ago.
You have been both a broker and a money manager. How do you compare the relative
advantages and disadvantages of these two jobs?
I got out of the brokerage business because I felt there was a gross conflict of interest: If you are
charging a client commissions and he loses money, you aren't penalized. I went into the money
management business because if I lost money, I wanted to be able to say that I had not gotten
compensated for it. In fact, it would probably cost me a bundle because I have an overhead that
would knock out the Bronx Zoo. I never apologize to anybody, because I don't get paid unless I
win.
Do you keep your money in your own funds?
I would say that 85 percent of my net worth is invested in my own funds, primarily because I
believe that is the safest place in the world for it. I really believe that I am going to be so defensive
and conservative that I will get my money back.
You did extraordinarily well during October 1987, a month which was a disaster for many
other traders. Could you fill in some of the details?
The week of the crash was one of the most exciting periods of my life.
We had been expecting a major stock market collapse since mid-1986 and had contingency plans
drawn up because of the possibility we foresaw for a financial meltdown. When we came in on
Monday, October 19, we knew that the market was going to crash that day.
What made you so sure?
Because the previous Friday was a record volume day on the downside. The exact same thing
happened in 1929, two days before the crash. Our analog model to 1929 had the collapse perfectly
nailed. [Paul Jones' analog model, developed by his research director, Peter Borish, superimposed
the 1980s market over the 1920s market. The two markets demonstrated a remarkable degree of
correlation. This model was a key tool in Jones' stock index trading during 1987.] Treasury
Secretary Baker's weekend statement that the U.S. would no longer support the dollar because of its
disagreements with West Germany was the kiss of death for the market.
When did you cover your short position?
We actually covered our shorts and went somewhat long on the close of the day of the crash itself
[October 19].
Were most of your profits in October due to your short stock index position?
No, we also had an extremely profitable bond position. The day of the crash we put on the biggest
bond position we ever had. The bond market had been acting terrible all day long on October 19.
During the day, I was very concerned about the financial safety of our clients' and our own assets.
We had our assets with various commission houses on the street, and I thought those funds could be
in jeopardy. It was an intolerable situation for me.
I kept on thinking: What is the Fed reaction going to be? I thought that thev would have to add
massive amounts of liquidity to create a very rosy environment, instantaneously. However, since
bonds had been acting poorly all day, I couldn't bring myself to pull the trigger on a long bond
position. During the last half hour of trading, bonds suddenly started to turn up, and it clicked in my
mind that the Fed was going to take actions that would create a tremendous upsurge in bond prices.
As soon as I saw the bond market act right for a moment, I went wild.
Do you believe that October 1987 was an early warning signal of more negative times ahead?
I think the financial community, particularly Wall Street, was dealt a life-threatening blow on
October 19, but they are in shock and don't realize it. I remember the time I got run over by a boat,
and my backside was chewed up by the propeller. My first thought was, "Dammit, I just ruined my
Sunday afternoon because I have to get stitched up." Because I was in shock, I didn't even realize
how badly cut up I was until I saw the faces of my friends.
Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down
something that might have taken ten years to build. If the economy starts to go with the kind of
leverage that is in it, it will deteriorate so fast that people's heads will spin. I hate to believe it, but
in my gut that is what I think is going to happen.
I know from studying history that credit eventually kills all great societies. We have essentially
taken out our American Express card and said we are going to have a great time. Reagan made sure
that the economy would be great during his term in office by borrowing our way into prosperity.
We borrowed against the future, and soon we will have to pay.
Are you blaming the current situation on Reaganomics?
I think Reagan made us feel good as a country—and that is wonderful— but, in terms of
economics, he was the biggest disaster that ever struck. I think he basically hoodwinked us by
promising to cut the deficit, and then went on the biggest spending binge in the history of this
country. I don't think a Democrat could have gotten away with it, because everyone would have
been very vigilant about a $150-180 billion deficit.
Do you see any way in which we can solve our current problems before we go into a deep
recession, or even depression?
That is what scares me so much. I don't see any blueprint out of our current dilemma. Maybe there
are macroeconomic forces at work that are part of a larger super cycle that we don't have any
control over. Perhaps we are simply responding to the same type of cycles that most advanced
civilizations fell prey to, whether it was the Romans, sixteenth-century Spain, eighteenth-century
France, or nineteenth-century Britain. I think that we are going to be in for a period of pain. We are
going to relearn what financial discipline is all about.
Do you use trading systems at all?
We have tested every system under the sun and, amazingly, we have found one that actually works
well. It is a very good system, but for obvious reasons, I can't tell you much more about it.
What type of realm does it fall into: contrarian? trend following?
Trend following. The basic premise of the system is that markets move sharply when they move. If
there is a sudden range expansion in a market that has been trading narrowly, human nature is to try
to fade that price move. When you get a range expansion, the market is sending you a very loud,
clear signal that the market is getting ready to move in the direction of that expansion.
Are you trading a portion of your funds on that system at the present time?
We just started trading the system about six months ago, and so far it is doing very well.
Do you feel a good system can compete with a good trader?
A good system may be able to trade more markets effectively than a good trader because it has the
advantage of unlimited computing power. After all, every trade decision is the product of some
problem-solving process—human or otherwise. However, because of the complexity in defining
interacting and changing market patterns, a good trader will usually be able to outperform a good
system.
But a good system can help diversify?
Unequivocally. A good system will catch ten times as much of the price move as I will, during the
15 percent of the time a market is in a major trending phase.
The following section of the interview was conducted two weeks later. During the interim, Jones
had reversed his trading bias on the stock market from bearish to bullish.
Two weeks ago you were very bearish. What made you change your mind?
You mean besides the Wall Street Journal article that publicized to the world that I was short 2,000
S&P contracts? The market didn't go down. The first thing I do is put my ear to the railroad tracks.
I always believe that prices move first and fundamentals come second.
Do you mean that if you were right, prices should have gone down and the didn't?
and; they didn't?
One of the things that Tullis taught me was the importance of time. When I trade, I don't just use a
price stop, I also use a time stop. If I think a market should break, and it doesn't, I will often get out
even if I am not losing any money. According to the 1929 analog model, the market should have
gone down — it didn't. This was the first time during the past three years that we had a serious
divergence. I think the strength of the economy is going to delay the stock market break.
I believe one reason why we are diverging from the 1 929 model is because of the much easier
availability of credit today. Volvo is giving out 120-month car loans. Think about that! Who owns a
car for ten years? Twenty years ago, the average length of a car loan was twenty-four months;
today it is fifty-five months. I think the final bottom line will be the same, but the ease of credit will
delay the process relative to the 1920s, when we had a cash economy.
Some of your preliminary comments before the start of our interview today make it sound
like you are paranoid because of your success.
If the misery in this country gets deep enough, the perception is going to be that we did well as a
trading firm, while other people were hurt, because we had some knowledge. It is not that we had
any unfair knowledge that other people didn't have, it is just that we did our homework. People just
don't want to believe that anyone can break away from the crowd and rise above mediocrity.
I understand that, similar to a number of other traders I have interviewed, you have trained a
group of apprentice traders. What was your motivation?
When I was twenty-one years old, a guy took me under his wing and it was the greatest thing that
ever happened to me. I felt an obligation to do the same thing for other people.

How did you find the people you trained?
Countless interviews. We have been deluged by applicants.
How many traders have you hired?
About thirty-five.
Have they been successful?
Some have done very well, but overall we have had mixed success.
Do you believe that is because it takes talent to be a good trader?
I never thought that before, but I am starting to believe that now. One of my weaknesses is that I
always tend to be too optimistic, particularly about the ability of other people to succeed.
Was your I Have a Dream Program, in which you have pledged to sponsor the education of a
group of kids from a poverty sticken area, inspired by the "60 Minutes" show about Eugene
Lang?
Right. I went to talk to him the week after the show, and within three months we had set up our
own program. I have always been a big believer in leverage. The thing that really turned me on
about the program was the potential for its multiplicative impact. By helping one kid, you can have
an impact on his family and other kids.
We have also recently set up a new program called the Robin Hood Foundation. We are trying to
seek out and fund people who are on the frontlines in providing food and shelter to the poor. We
are seeking out the people who are used to working with virtually no budget at all, rather than the
bureaucracies, which often do not deploy the money effectively.
Has this become a major part of your life?
I would say so. The markets have been so good to me that I feel I should give back something in
return. I can't say that I have been successful because I am better than anybody else. By the grace of
God, I was in the right place at the right time, so I feel a tremendous obligation to share.
Is the positive intensity of winning as strong as the pain of losing?
There is nothing worse than a bad trading day. You feel so low that it is difficult to hold your head
up. But, if I knew that I could also have a similar experience in the exhilaration of winning, I would
take the combination of winning and losing days any time because you feel that much more alive.
Trading gives you an incredibly intense feeling of what life is all about. Emotionally, you live on
the extremes.
What is the most important advice you could give the average trader?
Don't focus on making money; focus on protecting what you have.
Do you still see yourself trading ten or fifteen years down the road?
I wouldn't have it any other way.
Paul Jones was a winning trader from his start in the business, but, in the early years, his
performance was volatile. It took a traumatic trading experience to permanently forge the
importance of risk control into his mind. Since that gut-wrenching cotton trade in 1979, Jones has
managed to maintain excellent net profitability, while bringing his risk way down.
Today, risk control is the essence of Jones' trading style and success. He never thinks about what he
might make on a given trade, but only on what he could lose. He mentally marks each of his
positions to the market. No matter how large a profit he may have in a position, in Jones' mind his
entry price was the previous night's close. Since this approach assures that there is never a cushion
in his trades, Jones never gets complacent about any of his positions. He not only watches the risk
of each position, but he closely monitors the performance of his entire portfolio in real-time. If his
total equity drops 1 to 2 percent during a single trading session, he might well liquidate all of his
positions instantaneously to cut his risk. "It is always easier to get back in than to get out," he says.
If Jones' trading starts going poorly, he will continually reduce his position size until he is on track
again. That way, when he is trading his worst, he is also trading his smallest. In any month with net
trading losses, Jones will automatically reduce his risk exposure to make sure he never registers a
double-digit loss in a single month. After big winning streaks, he is particularly cautious about
getting overconfident.
In short, Jones maintains risk control in a dozen different ways. As he puts it, "The most important
rule in trading is: Play great defense, not great offense."