Anyone remember this from the Trader (1987) documentary?: ‘’Sell 1,000 at the market.’’
The setup was in October when the S&P 500 had the biggest single-day crash in its history and the man shouting these words was Paul Tudor Jones (PTJ), the hedge fund manager.
For weeks leading up to the crash, PTJ was testing the waters, selling two or three thousand big S&P contracts, then offering more as the futures sold off. After the smoke cleared (23percent worth of value had been wiped out), it is estimated he profited with about Sh30 billion from the crash.
Only last year, the Chicago Mercantile Exchange (CME) chose to delist the S&P 500 index futures but retained the more liquid S&P 500 e-minis (similar to the mini NSE 25 Share Index at the Nairobi Securities exchange derivatives market).
Today’s article is a focus on PTJ’s trading wisdom gleaned from his many interviews - we will focus on e-minis later.
One; losers average losers. Investors should not buy more into a stock when the price has dropped after their initial buy. Although shares may be cheaper at that moment, it mainly means the stock has moved in the opposite direction than what was expected.
So one shouldn't average down on a losing position and instead, do the opposite and average upon their position that shows a profit.
In other words, when your analysis is proven right, it’s time to back it up with more of your capital. PTJ extends this common sense approach to his overall position sizing. He believes that when traders are on a losing streak, it is better for them to not risk more money.
They should cut down the size of their positions for a while and avoid taking risks until they get back in sync with the market. This may seem counterintuitive as most traders often feel the need to bounce back after a losing streak by trading bigger position sizes but it is right to do.
Two; follow the trend. To be successful in trading, all traders need to do is buy stocks that will go up and sell them at higher prices. Traders should keep things simple and understand that this is their main objective for which they need to learn how to identify the stocks that are going to make a move.
Next to this crucial point is risk management which is one of the key areas to learn as a trader. When things are going your way, traders should give their trade the time to develop and let them ride and increase profits.
On the other hand, when things are not going as anticipated, they shouldn't hesitate to sell their position as soon as possible.
Three; don’t be overconfident. It is most important for an investor to learn to leave his/her ego out of work. As soon as one starts feeling overconfident and believes that one has got everything under control, that's the time s/he would falter.
One should accept that s/he can never be in full control of the stock market. The only thing one can control are own actions and how s/he can best react to changing market conditions.
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Note: The results are not exact but very close to the actual.
