Paul Tudor Jones: The Trader Who Made 200% in the 1987 Crash

The $100 Million Trade

October 19, 1987. Black Monday.

The Dow Jones crashed 22.6% in a single day. $500 billion evaporated. Investors lost decades of wealth💡 Definition:Wealth is the accumulation of valuable resources, crucial for financial security and growth. in hours.

While most traders were destroyed, one man made history.

Paul Tudor Jones returned 200% that year, earning an estimated $100 million personally.

His Tudor Futures💡 Definition:Futures are contracts to buy or sell assets at predetermined prices, helping manage risk and speculate on price movements. Fund gained 62% in October 1987 alone while the market crashed.

How did he do it?

Jones predicted the crash months in advance. He studied market patterns, identified the warning signs, positioned his fund with put options💡 Definition:Options are contracts that grant the right to buy or sell an asset at a set price, offering potential profit with limited risk., and executed with perfect discipline.

While others panicked, Jones profited.

But here's what makes his story remarkable: The 1987 crash wasn't luck. Jones has maintained legendary performance for over 40 years by following systematic principles anyone can learn.

Meet two traders using different approaches:

Marcus had bigger wins but catastrophic losses. Sarah had consistent, 💡 Definition:Interest calculated on both principal and accumulated interest, creating exponential growth over time.compounding💡 Definition:Compounding is earning interest on interest, maximizing your investment growth over time. returns.

Over 10 years:

• Marcus's portfolio: +180% (volatile, stressful)
• Sarah's portfolio: +320% (steady, sustainable)

The difference? Sarah followed Paul Tudor Jones's risk management principles: limit risk, maintain discipline, survive to trade another day.

This guide reveals Jones's complete playbook: the strategies that predicted crashes, the risk management that preserved capital, and the discipline that built billions.

Who Is Paul Tudor Jones?

From cotton trader to macro legend:

Paul Tudor Jones started trading cotton futures in the 1970s. He learned the fundamentals: supply, demand, price action, and risk management.

In 1980, he founded Tudor Investment Corporation with $1.5 million. His approach: macro trading based on global economic trends, technical analysis, and strict risk control💡 Definition:The process of identifying, assessing, and controlling threats to your financial security and goals..

By 1987, his fund managed $330 million. Then came Black Monday.

The prediction that changed everything:

In early 1987, Jones and his chief strategist Peter Borish noticed something disturbing: The 1987 market looked eerily similar to 1929.

They meticulously compared charts, market momentum, and economic conditions.

The parallels were uncanny:

• Extreme overvaluation
• Parabolic price moves
• Euphoric investor sentiment
• Credit tightening by central banks

Jones positioned his fund for a crash:

• Bought put options on major indexes
• Reduced long positions
• Hedged remaining exposures

When October 19 arrived, Jones was ready.

The result:

While the S&P 500 crashed -20.47% on Black Monday:

• Jones's fund gained 62% in October
• Full-year 1987 return: 200%
• Personal profit: ~$100 million

The trade that made him a legend wasn't luck. It was systematic preparation meeting opportunity.

The Paul Tudor Jones Trading Philosophy

Principle 1: Defense First, Offense Second

Jones's famous quote:

"The most important rule💡 Definition:Regulation ensures fair practices in finance, protecting consumers and maintaining market stability. is to play great defense, not great offense. Every day I assume every position I have is wrong."

The mindset shift:

Most traders focus on: "How much can I make?"

Jones focuses on: "How much can I lose?"

David's transformation:

David started trading with $50,000 in 2019, focusing on maximum gains:

• Year 1: +85% (felt like a genius, took bigger risks)
• Year 2: -62% (market reversal destroyed portfolio)
• Result: $56,000 → $51,800 (net -8% despite one great year)

In 2021, David adopted Jones's defense-first approach:

• Set 1% maximum risk per trade
• Focus on preventing losses, not chasing wins
• Scale position size based on risk, not conviction

Results:

• Year 1: +18%
• Year 2: +22%
• Year 3: +15%
• 3-year compound: +64% with much lower stress

The paradox: Focusing on defense created better offense.

Principle 2: The 5:1 Risk-Reward System

Jones's cornerstone rule:

Risk $1 to make $5.

The math:

With a 5:1 reward-to-risk ratio, you can be wrong 80% of the time and still profit.

Example:

10 trades, risking $100 each:

• 8 losses: -$800
• 2 wins at 5:1: +$1,000
• Net profit💡 Definition:Net profit is your total earnings after all expenses; it shows your business's true profitability.: +$200

Even with a terrible 20% win rate, you're profitable.

Sarah's implementation:

Sarah trades forex with Jones's 5:1 system:

Trade setup:

• Entry: EUR/USD at 1.1000
• Stop loss: 1.0950 (50 pips risk = $100)
• Take profit: 1.1250 (250 pips reward = $500)
• Risk-reward: 5:1

Her stats over 100 trades:

• Win rate: 38%
• 38 wins × $500 = $19,000
• 62 losses × $100 = -$6,200
• Net profit: $12,800

With less than a 40% win rate, she still made $12,800.

The discipline required:

The hardest part? Taking many small losses while waiting for big wins.

Marcus couldn't handle it. After 5 small losses in a row ($500 total), he abandoned his plan and revenge-traded, losing $3,000.

Sarah stuck to the system. Those 5 losses were followed by 2 wins that made $2,500, turning -$500 into +$2,000.

Principle: The system only works if you follow it through losing streaks.

Principle 3: The 200-Day Moving Average Rule

Jones's key technical indicator:

"My metric for everything I look at is the 200-day moving average of closing prices. If you use the 200-day moving average rule, then you get out."

The strategy:

• When price is above the 200-day moving average → Bullish, stay long
• When price crosses below the 200-day moving average → Bearish, exit or go short

Jennifer's application:

Jennifer trades S&P 500 💡 Definition:A basket of stocks or bonds that trades like a single stock, offering instant diversification with low fees.index fund💡 Definition:A type of mutual fund or ETF that tracks a market index, providing broad market exposure with low costs. using the 200-day moving average:

2020 strategy:

• February 2020: S&P crosses below 200-day → Sell
• April 2020: S&P crosses above 200-day → Buy
• Result: Avoided -34% crash, bought near recovery bottom

2022 strategy:

• January 2022: S&P crosses below 200-day → Sell
• October 2022: S&P crosses above 200-day → Buy
• Result: Avoided -25% bear market💡 Definition:20%+ sustained market decline from recent peak. Characterized by fear, pessimism, and falling prices. Buying opportunity for long-term investors., bought near bottom

Performance:

• Without 200-day rule: +8% annual return (buy and hold💡 Definition:A long-term investment strategy focusing on buying stocks and holding them for years to capitalize on growth.)
• With 200-day rule: +14% annual return (tactical timing)

The simple indicator added 6% annual performance while reducing volatility💡 Definition:How much an investment's price or returns bounce around over time—higher volatility means larger swings and higher risk. and maximum drawdown.

Why it works:

The 200-day moving average represents the long-term trend. Trading with the trend (not against it) increases your probability of success.

The Macro Trading Approach

Understanding Global Economic Forces

Jones doesn't pick individual stocks. He trades macro themes based on economic cycles, central bank policy, and market structure.

His edge: Understanding how global forces create investment opportunities.

The 2020 trade:

In March 2020, Jones identified a perfect macro setup:

• Federal Reserve💡 Definition:The Federal Reserve controls U.S. monetary policy to stabilize the economy and influence inflation and employment. cutting rates to zero
• Unlimited quantitative easing
• Government stimulus packages
• Market panic creating undervaluation

His thesis: Central bank money printing + economic recovery = massive asset price inflation💡 Definition:General increase in prices over time, reducing the purchasing power of your money..

He bought:

• Gold (inflation hedge)
• Bitcoin (digital gold💡 Definition:Bitcoin is a decentralized digital currency that empowers users with financial autonomy and investment potential. thesis)
• Stocks (liquidity💡 Definition:How quickly an asset can be converted to cash without significant loss of value-driven rally)

The results:

• Gold: +25% over 12 months
• Bitcoin: +300% over 12 months
• Stocks: +70% over 12 months

Jones didn't predict which specific stocks would win. He predicted that ALL assets would rise due to monetary policy, and positioned accordingly.

Marcus's macro framework:

Inspired by Jones, Marcus created a simple macro checklist:

Before making any major allocation decision:

• What is the Fed doing? (Tightening or easing?)
• What is inflation doing? (Rising or falling?)
• What is economic growth doing? (Expanding or contracting?)
• What is market sentiment? (Greedy or fearful?)

The combinations:

This framework helped Marcus position for major market moves:

• March 2020: Easing + falling inflation + fear = Buy stocks aggressively
• November 2021: Tightening + rising inflation + greed = Sell stocks
• October 2022: Easing pivot + falling inflation + fear = Buy stocks

Results: +78% over 3 years vs +42% for buy-and-hold.

Risk Management: The 1% Rule

The foundation of Jones's success:

Jones limits risk to 1% of capital per trade.

Why this matters:

With 1% risk per trade, you can lose 100 consecutive trades before your account is wiped out.

In reality, even terrible traders don't lose 100 in a row. The 1% rule makes your account virtually indestructible.

David's calculation:

Account size: $100,000 Maximum risk per trade: 1% = $1,000

Trade setup:

• Entry: $50
• Stop loss: $48
• Risk per 💡 Definition:Equity represents ownership in an asset, crucial for wealth building and financial security.share💡 Definition:Stocks are shares in a company, offering potential growth and dividends to investors.: $2

Position size calculation: $1,000 risk ÷ $2 risk per share = 500 shares

Key insight: Position size is determined by risk management, not arbitrary amounts.

The psychological advantage:

When David risks $1,000 per trade (1%), a loss doesn't devastate him emotionally. He can take the loss, learn from it, and move on to the next trade.

When Marcus risked $20,000 per trade (20%), every loss felt catastrophic. He couldn't maintain discipline after 2-3 losses and would abandon his strategy.

Jones's wisdom:

"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."

Cutting Losses: The Hardest Discipline

Jones's approach to losing positions:

"If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading."

The psychology:

Cutting losses quickly is the hardest discipline because it requires admitting you were wrong.

Sarah's struggle:

Sarah bought a stock at $50 with a $48 stop loss.

It dropped to $48. Her stop triggered.

Her mind: "It's only down 4%. It could bounce back. I don't want to lock in a loss."

She overrode her stop, held, and watched it fall to $35 (-30%).

The cost: Her inability to take a small 4% loss resulted in a devastating 30% loss.

The solution: Systematic stops

Jennifer's mechanical approach:

1. Set stop loss BEFORE entering trade
2. Place stop order with broker (removes emotion)
3. Never override stops, ever
4. Accept that some stopped-out positions will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. reverse (that's okay)

Results over 50 trades:

• 8 positions stopped out but later recovered: -$800
• 42 positions continued down after stops: Prevented -$12,000 in losses
• Net benefit of stops: $11,200 saved

Yes, sometimes stops get hit and the position recovers. But the 90% of times stops prevent disaster far outweigh the 10% of false signals.

Jones's perspective: It's better to get stopped out and be wrong than hold and be devastated.

The Contrarian Mindset

Jones's approach to crowd psychology:

When everyone is bullish, Jones looks for reasons to be bearish. When everyone is bearish, Jones looks for reasons to be bullish.

The 1987 setup:

1987: Record highs, extreme optimism, magazine covers declaring the "end of bear markets."

Jones's reaction: "This is exactly when crashes happen. Position for disaster."

The 2020 setup:

March 2020: Record panic, extreme pessimism, headlines declaring "end of capitalism."

Jones's reaction: "This is exactly when recoveries happen. Position for recovery."

Marcus's contrarian trades:

Trade 1 - March 2020:

• Sentiment: Extreme fear, everyone selling
• Marcus's action: Bought aggressively
• Result: +68% over next year

Trade 2 - November 2021:

• Sentiment: Extreme greed, "stocks only go up" mentality
• Marcus's action: Took profits, reduced exposure
• Result: Avoided -25% decline in 2022

Trade 3 - October 2022:

• Sentiment: Extreme fear, "everything is crashing"
• Marcus's action: Bought quality at discounts
• Result: +45% over next 18 months

The pattern: Maximum pain = maximum opportunity.

The challenge: Trading against your emotions and the crowd requires immense discipline.

Lessons for Modern Investors

Lesson 1: Risk First, Returns Second

The priority shift:

Most investors ask: "How can I double my money?"

Jones teaches: "How can I avoid losing my money?"

Application:

Before every investment, ask:

• What can I lose?
• What's my stop loss?
• Is my risk-reward ratio at least 3:1 (ideally 5:1)?
• Can I afford to lose this amount?

Only after answering these questions ask: "How much can I make?"

Lesson 2: Be Wrong Often, Just Survive

Jones's track record:

He's not right 90% of the time. He's often right just 30-40% of the time.

But his risk management ensures:

• Small, manageable losses
• Large, portfolio-changing wins
• Net positive over time

Your application:

Stop trying to be right all the time. Focus on managing risk when you're wrong.

Lesson 3: Follow Trends, Don't Predict Them

Jones's 200-day moving average:

He doesn't predict whether markets will go up or down. He follows what they're already doing.

The wisdom:

"The trend is your friend until it bends."

Trade WITH the trend, not against it.

Lesson 4: Humility Keeps You Alive

Jones's daily mindset:

"Every day I assume every position I have is wrong."

This prevents:

• Overconfidence
• Revenge trading after losses
• Holding losing positions too long
• Taking excessive risk

Your practice:

Each morning, review your positions and ask: "If I didn't own these, would I buy them today at current prices?"

If the answer is no, sell.

The Bottom Line: Defense Wins Championships

Paul Tudor Jones didn't build billions through aggressive trading. He built billions through defensive risk management.

The core principles:

1. Limit risk to 1% per trade - Makes account indestructible
2. Target 5:1 risk-reward - Win 20% of the time, still profit
3. Cut losses immediately - Prevent small losses from becoming catastrophic
4. Follow the 200-day trend - Don't fight the market
5. Trade macro themes - Understand global economic forces
6. Stay humble - Assume you're wrong until proven right

Sarah's success came from disciplined risk management. Marcus's early losses came from aggressive position sizing. David's recovery came from adopting Jones's principles.

The trading strategy that made 200% in 1987 wasn't about being a genius. It was about systematic preparation, risk control, and emotional discipline.

Ready to implement risk management in your portfolio? Use our Portfolio Rebalancing Impact calculator to test defensive strategies, or explore our Stock Returns Calculator to model long-term compounding with proper risk controls.

Remember Jones's wisdom: "Don't focus on making money; focus on protecting what you have." The profits will follow.