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Trading is timing, so goes the old adage and when it comes to intraday trading that’s certainly never been truer than now. We spend all our days and night perfecting the timing of our trades. We write algos, we test strategies, we pour over charts.
But 99.9% of our time retails traders focus on entries. Exits are always relegated to various strategies on price. We look to trade with fixed exits, scale out exits, scaled in exits and every trick imaginable in inventory management.
Very few traders focus on time stops – using time rather than price to exit the trade that hasn’t hit the take profit. Yet time stops maybe one of the greatest risk control tools in the markets and yet one of the least utilized.
One of the greatest examples of a time stop comes from Jack Schwager’s Market Wizards interview of Paul Tudor Jones. The interview takes place in the wake of 1987 Stock Market Crash (still the biggest single day decline ever) and PTJ spends most of the conversation essentially talking about the end of the world as he presents a reason after reason for being short. A few week’s later Schwager catches up with Jones and much to his surprise discovers that PTJ is no longer short. Jones tell him that he always uses a time stop along with the price stop and when his 1929 analog model did not confirm his thesis he got out.
Contrast that behavior with Robert Prechter who at the time was considered to be the greatest market analyst alive. He had predicted the bull market of the 1980’s but after the ‘87 crash turned bearish and stayed bearish through Dow 4,000, Dow 10,000 and now Dow 20,000 – I kid you not.
A time stop is essentially a check on your ego which is why it is such a powerful tool of risk control. Presently I trade with a 10 minute time stop – which we are going to automate shortly. Am I going to miss out some take profits? No doubt. Am I going escape many unnecessary stop outs? I believe I will.