Price-Action Rules

The following exchange is a brief and rather illuminating excerpt from Jack Schwager's interview with Paul Tudor Jones from the 1990 national best-seller Market Wizards (INTERVIEWS WITH TOP TRADERS.)

http://www.safehaven.com/article/9216/price-action-rules

Jack Schwager: 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?

Paul Tudor Jones: I have very strong view of the long-run 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.

Jack Schwager: Is it a matter of doing a series of probes until you finally hit it?

Paul Tudor Jones: 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.

Jack Schwager: In other words, it makes a better story to say, "Paul Tudor 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."

Paul Tudor Jones: 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.