Now that I am sure you have fully watched the Paul Tudor Jones Documentary, we can get into what are the important lessons and nuggets of value from the video. ¬†Information and watching cool videos is great, but actually knowing what information is important and understanding it is even more beneficial.
Let us go into the lessons and recap from the Paul Tudor Jones documentary:
In the beginning, Paul talks about the coming stock market crash that he is predicting to come. ¬†What type of analysis is he performing? ¬†Is he predicting a crash based on ichimoku kinko hyo? ¬†Is he relying on a moving average crossover, perhaps the death cross? Perhaps global macro?
Risk Reward Ratio
Then, Paul tries to issue an order to sell “3,000 @ 70.” ¬†Which means a limit order for 3,000 contracts. ¬†Then, he proceeds to cancel that order and issue a market order for 540 contracts. ¬†Paul is trying to spook the market with this sell orders. ¬†First he was passive with a limit order, then he became aggressive with a market order.
Then, when he talks to his chief economist and right hand man, Peter Borish he tells him that “he is risking 10 cents to make 8 bucks.” ¬†This is an important lesson in risk reward here, because Paul Tudor Jones is using a tight stop loss that he obviously believes is fine in that situation. ¬†His perceived reward risk ratio in his mind is 80:1, which is extremely high. ¬†He is probably hoping to catch a nice huge breakout and ride it for a nice swing trade where the trade goes in your favor each and every day for a few days in a row. ¬†You don’t find many 80:1 reward risk ratio trades out there and Paul was probably high balling it.
Then the broker talks about Paul Tudor Jones and says “he wakes up 4 in the morning to trade gold in Hong Kong.” ¬†Another important clue. ¬†Great traders, especially day traders, will wake up in the middle of the night to take advantage of volatility in other markets that may trade in other time zones. ¬†Because Paul Tudor Jones knows that if he waits until the New York Open, then the move might of already happened. ¬†So that is why he wakes up early in the morning to potentially catch the volatility.
Also, if you caught the broker giving him a quote for Deutsche Marks. ¬†He said “63 -73 @ 800 contracts.” ¬†Presumably the spread for Deutsche Marks was 10 pips back then, but Paul still wanted to trade them.
Then his broker friend says that “He really loves it. ¬†It involves all his energy, power, knowledge.” ¬†I guess Paul is trying to get in harmony with the order flow and get a very strong feel of the market participants.
Also if you noticed the small device in his hand while he was walking, he was probably checking quotes on it.
Then Paul Tudor Jones tried to go on vacation to Gstaad, Switzerland, where he did business as well. ¬†He said he “wouldn’t¬†trade it for anything in the world.” ¬†He proceeded to say that “if life ceases to be an educational experience, then I probably wouldn’t get out of bed.” ¬†Another clue that he is hungry for knowledge and to improve his skills. ¬†He isn’t looking for the easy button or magic forex robot.
Back then Paul was 32 years old and managed $125 million dollars, with just 22 employees.
Peter Borish then says that “he is graded instantly through the harshest teacher in the world, it’s the market.” ¬†That is right, if you day trade you can get graded instantly. ¬†The market tells you whether you are right and wrong.
They said Paul trades futures in cotton, oil, dollars, Deutsche¬†Marks, precious metals and “anything he thinks can turn a profit.” ¬†What does that mean exactly? ¬†Well, Paul Tudor Jones knows about order flow, liquidity, and volatility. ¬†The “anything he thinks can turn a profit” quote means Paul is looking for some volatility to make money. ¬†A breakout, a nice trend, or a nice reversal.
Crude Oil Trading Event
Then the video proceeds to talk about Jones analyzing the OPEC news announcement that they may have a 7% production cut. ¬†If OPEC issues a production cut, then crude oil will typically rally as there are less supplies on the market. ¬†The market participants who were not expecting a 7% production cut and are short would be forced to cover their positions. ¬†Then anyone who is flat, may decide to buy up some crude oil contracts if they believe the 7% production cut will drive the price higher. ¬†That is bullish order flow. ¬†So if the news announcement is not finalized, then people could be just buying the rumor. ¬†What type of news trading is Paul Tudor Jones engaging in?
Then Paul proceeds to take the position that the 13 people will not come to an agreement because it is very difficult to get them all together to agree on anything. ¬†It looks like the price of crude oil was gaping higher due to that rumor and Paul said he was going to “sell the equivalent of 4 tankers at the opening.”
Then Paul starts calling some buddies to get their views on the situation and to determine “whether this is the spot to nail it.” ¬†Nail it meaning he wants to sell a whole bunch of contracts and push the price down. ¬†He was trying to sell crude oil contracts as fast as he could hoping that the other traders will not notice the huge elephant in the room (huge seller) just yet. ¬†Paul wants to get in a short position first before the people realize what is going on.
Then Paul proceeds to issue an limit order to sell “1,500 contracts at a half.” ¬†Now the broker and Paul know what the big price is. ¬†Big price means what the big number the market is trading at. ¬†So if crude oil is trading at $9.50, Paul is not going to say “sell 1,500 at nine dollars and fifty cents.” ¬†He is going to just shorten it and say “sell 1,500 at a half”, and both the broker and Paul knows that he means $9.50.
Then Paul told his broker to “show them size.” ¬†Paul is trying to spook the market that he has huge sell limit orders coming. ¬†Then he said to tell the broker that there is “more behind it.” ¬†In other words that Paul wanted to sell even more contracts. ¬†Again, he is trying to spook the market. ¬†Because when a crazy seller comes in guns blazing with huge orders, the people on the other side of the transaction are going to start thinking. ¬†They are going to start saying to themselves, does this guy know something? ¬†Does he have information that we don’t and knows the OPEC agreement is going to fall apart? ¬†Paul knows that if he can spook the market then the people long may start to bail out of their positions. ¬†But Paul wants that to happen so they can push the price down. ¬†Paul has already gotten filled on some sell orders so he already has a position on.
Now he wants other traders to come to the same conclusion as him and start to push the price lower. ¬†For Paul Tudor Jones knows that the behavior of other traders will determine whether the wins or losses, especially when you have on a massive position.
Then Paul is calling up trying to get information on the various OPEC members to see if they have an agreement. ¬†Paul is plugging himself into the information flow. Notice that he is not looking at any MACD, stochastics, trendlines, forex robots, etc. ¬†For Paul knows that the trade he has on, has nothing to do with the information on the chart. ¬†Jones knows that the trade has everything to do with the information that does not appear on the chart. ¬†So he is fishing for information, so he can attain an information edge.
Then Paul proceeds to call his buddy at another crude trading firm. ¬†His buddy knows that there was someone selling a lot of oil, but doesn’t know that it was Paul Tudor Jones. ¬†This happens a lot. ¬†Top traders may call each other, call their buddies and they can fish for information on what is going on in the market and who has big positions on. ¬†Occasionally¬†they may both be on opposite sides of the market battling it out against each other.
Paul proceeds to say that “I hope they think that it is some wild¬†Arab¬†who knows the whole agreement is going to fall apart.” ¬†This is an important statement because it means that Paul knows that the market is sensitive to Arab traders. ¬†Why? ¬†Because chances are they have access to the best information flow – NOT technical analysis. ¬†Therefore if the market believes that some Arab came in and sold a lot, they may believe that he is an informed trader and know something – that the agreement might fall apart.
Another scene unfolds where Peter Borish says that “the market goes down so much faster than it goes up, its incredible. ¬†It can take out two weeks of works in three hours.” ¬†Peter is talking about that fear can be a much stronger emotion than greed. ¬†Meaning that if the market is fearful especially as attributed to stocks, since many people can be long betting on the U.S. economy, then if fear takes hold the market can go down a lot as people just move to cash. ¬†It can sometimes take a while for that confidence to rebuild again.
Then Paul proceeds to analyze the news headlines and shows off all the bad news, but that the stock market doesn’t want to go down. ¬†Paul believes that the market is shrugging off the bad news and that can be a sign that the market wants to go up.
Elliot Wave Theory and Statistics
The documentary then begins to talk about¬†Elliot¬†Wave Theory,¬†which I do not believe in, but the video shows that they used it back in the 1980’s.
Peter Borish runs a correlation statistical analysis comparing the stock market action between 1925 – 1928 and 1982 – 1986. ¬†I don’t believe in that either but they seem to have used it to potentially gauge the timing of the 1987 stock market collapse.
Paul Tudor Jones Predicting The Stock Market Collapse
Paul is¬†predicting¬†a lot of fireworks,¬†unprecedented¬†volatility, and “moves that will leave people gasping.” ¬†Then, he said it will be “total rock and roll.” ¬†Why does he think that? ¬†Because Paul is doing his homework to determine and get a feel for timing the collapse. ¬†He knows it is coming, so it is just a matter of timing it correctly. ¬†Paul knows that he is flexible enough to catch the crash. ¬†He is flexible enough to pick up the small subtle signals that can occur, especially when he is day trading.
Boris then predicts the crash for the first quarter of 1988, but Paul Tudor Jones never took that timing seriously. ¬†He wasn’t going to rely too heavily on that type of timing. ¬†He knows that his gut feel of the market and subconscious market understanding can give him a feel for timing.
Paul then proceeds to explain what the various market participants are expecting. ¬†He is engaging in expectation and scenario analysis. ¬†Paul then talks a little bit about macro analysis when he explains the accumulation and repayment of debt. ¬†He says that drives every economic cycle there is.
Sunday Forex Trading
Paul then begins to trade forex on Sunday from his farm in Virginia. ¬†He knows the only markets open are in New Zealand and Hong Kong. ¬†Paul probably expects there to be some volatility, especially trading on a Sunday, where there isn’t that much liquidity and spreads are probably higher. ¬†You think he has a reason for the volatility? ¬†You think he is trading moving average crossovers on a Sunday evening?
Paul is trying to get in a large order of 1,100 contracts which was $70 million USD’s back then. ¬†In Deutsche Marks that is around $135 million that his broker tells him. That is a pretty big order for Sunday evening. ¬†Paul struggles to get such a large order filled because his potential counterparties don’t want the exposure. ¬†They think some guy from America coming in and trading such a huge amount “knows something”, in other words they believe he is an informed trader and do not want to provide liquidity to an informed trader.
Paul is getting a little anxious because he believes the market is going to start moving higher within the next fifteen minutes and he wants to get his order filled. ¬†Therefore he is willing to get the transaction executed and pay a 15 pip spread, which is why he said “if he can give me 30 bid at 45, I’ll deal on that for the whole amount.”
Paul then continues going on and saying that the Asian players believe that the guys from the states that trade so early on Sunday tend to have an information advantage, so they don’t want to deal with Paul. ¬†Paul knows that in a few more hours the dealers may be comfortable trading with him after they have digested the information and seen some price action, but Paul believes the the explosion of volatility can occur before then, so he wants to get his order filled.
Paul’s broker is then advising him that perhaps Paul should split up the order into smaller chunks to make it easier for other people to provide him liquidity. ¬†Because sometimes trying to get a big order done in one shot, it can be difficult to find a counterparty. ¬†But if it is split up into smaller chunks, perhaps many different market participants may provide him the liquidity.
Paul then gets an updated quote for the Deutche Mark, and the currency pair has risen to 45 bid ¬†– 55 offer. ¬†Paul lets out some frustration because the market is moving without him and he wants to establish a position. ¬†He knows he doesn’t want to chase the market. ¬†The quote then rises to 50 bid – 65 offer. ¬†Paul then decides to cancel the order and doesn’t want to deal at that amount. ¬†Another broker then calls him up and gives him a quote for 60 bid – 70 offer. ¬†The price just keeps on rising and Paul hasn’t been able to go long yet.
Paul then summarizes what happens and reminds himself that they started out at 30-45 and now they are at 60-70 and he is pissed off. ¬†Paul settles for a smaller position and only gets half the contracts he wants. ¬†Compare this to a¬†situation¬†where lets say you want to go long EUR/USD. ¬†The price is at 1.4330/45 and you believe the price is going to move up within the next hour or so. ¬†You issue a limit order, but your limit order doesn’t get filled and you watch as the market roars higher to 1.4360/70 and you have not gotten in yet. ¬†You don’t want to chase and you are kicking yourself for not executing a market order.
Paul then talks about how he should of just split up the order to begin with and gotten different investment houses to fill it. ¬†He acknowledges that his execution was very poor. ¬†Paul¬†acknowledges¬†that his lack of aggressive market orders cost him some money in that¬†situation. ¬†In other words he didn’t want to pay up.
December 5, 1986
Paul checks in with his friends and competitors 10 minutes before the open. ¬†He is trying to figure out which financial instrument will experience some volatility. ¬†Paul believes that stocks will experience a strong up day. ¬†He believes that most people will be trading and focusing on bonds and euros, and will miss out on the up move in stocks, and by the time they figure out that stocks are moving, they will have to jump in late, at which point Paul can close out his long trades to the people going long stocks which are late to the party.
Paul believes that if the market rallies a little bit that it will change the psychology of the market and shift the sentiment to being bullish. ¬†He believes that no one will want to sell it on a Friday as “the bulls will be on a stampede all the way into the close.”
Paul then begins to give his orders to the floor brokers. ¬†He wants to buy 300 contracts within the first two minutes no matter what the price. ¬†A very aggressive market order.
His broker tells him that the market is at “70 bid.” ¬†Paul realizes that the market is rising and he still wants to buy some more contracts. ¬†So what he decides to do is to sell some contracts and wants to “offer 1,000 at 75.” ¬†Meaning he wants to sell 1,000 contracts at 75. ¬†He wants to hide the fact that he is buying and hoping that the large sell order will trick the market.
Paul then wants to buy 300 more contracts at the price of 90 or lower. ¬†Paul and Borish agree that it is setting up for a¬†beautiful¬†trend day. ¬†They both think the market is going to roar higher. ¬†Paul really gets aggressive and wants to make sure he gets his full long position before the expected huge up day and says “do not screw around, I want to buy em.” ¬†Then Paul starts screaming into the phone to “Quote me, quote me, quote me, whats the market!” ¬†Paul really thinks that it is going to be a huge upday and wants to make sure prices are not going to shoot higher without him.
Eventually Paul gives an order for “90 for 3,000, fill or kill.” ¬†He wants to buy 3,000 contracts at the 90 price. ¬†And he wants it to be fill or kill, meaning that he wants the order to get executed in its entirety and immediately. ¬†Sometimes it can take a while for a large order to be¬†executed, and Paul wants to buy really fast, so he issues the fill or kill order. ¬†He wants his whole 3,000 contract buy order to be filled¬†completely¬†and immediately or not at all. ¬†It seems Paul wants to really put on a huge position for the day. ¬†He seems to have a lot of conviction.
Then Paul says that “well, I think we have a position.” ¬†It seems Paul was¬†satisfied¬†that he got in a big enough position size. ¬†Paul acquired stock index futures contracts worth around $90 – 100 million dollars. ¬†Remember his firm is managing around $125 million dollars so he is close to approaching 1:1 leverage. ¬†Ten minutes later the market did not go up and it went slightly down. ¬†Paul puts on good luck tennis shoes that he believes will help push the market higher. ¬†Paul then says humorously that “the future of the country hangs on these tennis shoes.”
Paul Tudor Jones then puts a godzilla toy above one of the trading monitors to”ward off all the bears back into their dens.” ¬†His employees are trying to laugh at it.
Paul then gives some trading advice and says that people are not focusing on what they can afford to lose. He says that “if everyone spent 90% of their time focusing on protecting what you have, rather than pie in the sky ideas about how much money you are going to make, then they would be incredibly successful investors.”
Bad Trading Day
By 12:20 pm on that same day the market decides to crash lower and Jones decides to cut his losses. ¬†He was trading a big position and could not afford to lose any more money. ¬†Paul then proceeds to start issuing sell orders to his brokers to start dumping his positions.
By 4:10 pm Paul Tudor Jones is licking his wounds.
Paul and Borish talk about total devastation. ¬†They thought the market was going to go one way and had a lot of conviction about it. ¬†After all Paul was tripping over his brokers earlier in the day trying to get his buy orders filled. ¬†The market decides to go the opposite way and Paul Tudor Jones was stuck with a huge loss. ¬†It happens to all of us, including top hedge fund managers.
Paul calculates his losses and they tally up to around a 5% loss. ¬†A 5% loss on $125 million under management is around $6 million dollars. ¬†A pretty hefty loss back then.
Paul then talks about the trader problem that creeps up from time to time and results in trading losses. ¬†He talks about “analysis that is so far off the mark.” ¬†It happens to all of us. ¬†We think the fundamental or breakout is pointing one way, but the market decides to go the other way.
But, Paul Tudor Jones acknowledges that it is part of the business and that it will happen a thousand other times, and that he needs to live with it.
February 17, 1987
Paul seems to have put on a very nice long position and it is in a profit. ¬†He could cash out for a few million dollar profit. ¬†Paul wants to sell the position and go flat before the end of the day, it is just a question of timing. ¬†He is trying to hold out for a better price. ¬†He is trying to hold out for another up move. ¬†Paul’s trader senses tell him the right call is to wait a little bit. ¬†Paul knows the market is ¬†going to hit an all time high and he wants to hold out for higher prices before selling. ¬†Paul made over $ 5 million dollars.
Many of us are in these situations. ¬†Perhaps you have placed a day trade and the market is up 100 pips and is ready to make a fresh high. ¬†You want to wait for the breakout, you want to wait for the stops to get tripped and see it run a little bit before you cash in. ¬†It is always a tough call, because you could always see the market come back and take out your paper profit.
The people who shorted the Euro on Friday June 10, 2011 faced a similar decision. ¬†Should they buy back their short trades around 1.4450? ¬†Should they wait for the stops to get tripped below 1.4450? ¬†Should they take profit at a nice round number at 1.4400? ¬†Should they wait for the some more stops to get hit below 1.4350? ¬†Decisions need to be made. ¬†Order flow accurate decisions need to be made.
Paul then talks about how they know where they are in relation to the “total economic landscape” and that helps reduce the uncertainty and helps you sleep at night. ¬†He knows what type of global macro environment he is trading in, and what his expectations are for the future week, month, and year or two.
Paul then predicts that the market is getting extremely long and they are getting comfortable with the stock market at such high levels. ¬†Then Paul Tudor Jones predicts that many of the investors and traders will want to bail out of the market at the same time and that his firm will be positioned to take advantage of such massive bearish order flow. ¬†That is why he thought it would be total rock and roll.
I hope you enjoyed it.
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