The Art of Defense by Paul Tudor Jones

"80% of a trader's income comes from that 20% of trades, and most of the time you are constantly trying and failing. The key is how to protect your capital when you fail."

In the trading world, most masters are known for long-term value investing or macro trend grasping, but Paul Tudor Jones (PTJ) has taken a completely different path. This trader, who emerged from the cotton futures trading floor, achieved a legendary record of over $100 million in single-day profits during the 1987 global stock market crash, with only $1.5 million in capital at the time.

From Cotton Futures to the King of Wall Street: An Unusual Rise

Paul Tudor Jones's trading career began in a rather unremarkable field—cotton futures. Unlike those traders who started directly on Wall Street, he began his career at the New York Cotton Exchange, learning from the renowned cotton trader Eli Tulis.

This experience shaped his unique trading style:

· Experience market fluctuations firsthand: In the trading hall's practical environment, he learned to "read" market sentiment and changes in liquidity.
· Early failed education: In 1979, he suffered significant losses in cotton futures, and this experience transformed him from an "aggressive trader" to a "defensive trader."
· Awakening of self-protection awareness: He later recalled, "When I lost 70% of my funds at once, I decided I needed to learn self-restraint and fund management."

Jones once declined the admission notice from Harvard Business School, choosing to stay on the front lines of the market. In 1980, he founded Tudor Investment Corp. with an initial capital of only $1.5 million. No one could have imagined that this small starting point would shock the entire financial world a few years later.

The Battle of the Gods: The Perfect Strike of "Black Monday" in 1987

On October 19, 1987, the Dow Jones Index plummeted 22.6% in a single day, causing panic in global markets. While most investors lost everything, Paul Tudor Jones achieved an annual return of approximately 200% through a meticulously planned trade.

His success is not accidental, but rather the result of meticulous preparation:

1. Historical Comparative Analysis: The Jones team compared stock market data from the periods of 1925-1929 and 1982-1987, finding that the similarity in patterns exceeded 90%.
2. Asymmetric risk layout: He does not predict the specific time of collapse, but identifies the extreme asymmetry of market risk - the downside potential is much greater than the upside potential.
3. Tentative Positioning: He adopts a "hypothesis-testing" method similar to Soros, starting with a small position for testing, then gradually increasing the size.
4. Dual Market Linked Operations: Shorting stock index futures while going long on government bond futures, utilizing the flow of hedging funds to amplify returns.

Jones later said: "I am not preparing for 'Black Monday', I am just preparing for a pullback and have tested many times." This statement reveals the essence of his trading philosophy - not predicting specific events, but preparing for various possibilities.

Core trading principle: Philosophy of defense first

Paul Tudor Jones' trading system is based on several simple yet powerful principles:

1. Infinite Game Thinking

Jones believes that the market is an "infinite game". His famous saying is: "Do not be loyal to your positions." This means that he is not attached to any specific viewpoint and is always ready to adjust his stance based on market changes.

2. Defense is the top priority.

He has a famous saying: "The first principle of success is outstanding defense." His risk control strategy includes:

· Any single transaction loss does not exceed 1% of the assets.
· Forced reduction of position size after consecutive losses
· Calculate the maximum possible loss daily and ensure it is bearable.

3. Only engage in trades with an unbalanced risk-to-reward ratio.

Jones believes: "You only need to make one type of trade, which is the kind of trade where the risk and reward are extremely unbalanced." He seeks opportunities that have limited downside risk and huge upside potential, typically requiring a risk-reward ratio of at least 1:5.

4. Self-discipline above all

"No matter when, I will strictly restrain myself." Jones understands that a trader's biggest enemy is oneself, so he has established a systematic self-discipline mechanism, including emotion monitoring, regular self-assessments, and mandatory breaks.

Three Stone Revelation

1. Survival First Mindset
Surviving in the market long-term is more important than short-term profits. Jones once said: "What I'm thinking about now is not how to make money, but how to minimize losses." This mindset is especially important in highly volatile markets such as cryptocurrencies.
2. Wait for high win rate opportunities
Jones emphasized: "Do not enter the forest at night; I always wait until dawn to go in." This means to avoid forced trading and only act when your advantages are most apparent.
3. Maintain Strategy Flexibility
He observed: "The most common mistake traders make is that their trading strategies remain constant." Market conditions are constantly changing, and trading strategies should be adjusted accordingly.
4. Acknowledge the role of luck
Despite the advanced technology, Jones admitted that there was also a part of luck involved in "Black Monday." This reminds us that no matter how confident we are, we should always remain humble and aware of the risks.

Three Stone Conclusion

Paul Tudor Jones's quote reveals the essence of his success: "The speed at which anything can be destroyed far exceeds the time it took to build it. Some things take ten years to build, yet can be completely destroyed in a day."

In a trading world filled with overconfidence and short-term thinking, Jones's story reminds us that true success does not belong to the one who predicts the best, but to the one who survives the longest. His principle of prioritizing defense, strict risk management, and infinite game thinking provide an eternal path for those traders who wish to survive long-term in the market.