Trading Tip: Use A “Time Stop”


Paul Tudor
Jones is a famous billionaire hedge fund manager. In an interview he gave to
Jack Schwager and later published in the book “Market Wizards”, Tudor Jones
reveals that he “doesn’t just use a price stop, but also a time stop”.

Beginner
traders are taught to use a stop loss to avoid big losses and protect their
capital. A stop loss is an order to buy or sell a specific instrument once the
price reaches a certain limit. If you’re selling your stop loss will be a buy
order and if you’re buying your stop loss will be a sell order.

Paul’s
concept is fairly simple as he explains in the book: “With a time stop, you can
set a specific time frame for a move to happen and when it doesn’t, you cut
your position no matter if you’re taking a loss or a small profit. The
instrument is not acting the way as you expected, so there is no reason to keep
your money in it.”

Let’s see an
example of a recent trade. Friday’s NFP report was a good one if you ignore the
headline miss and focus more on the details which highlight a tight labour
market with wages up and unemployment rate down. You could take a short trade
on Gold and place a stop loss above the recent swing point.

After some time though you could see that the trade wasn’t playing out
as you expected, and the price action became messy and rangebound. If you
expected the price to fall, as such good NFP report puts more pressure on the
Fed to act swiftly, then why should you keep your money at risk if it’s not
following your views? Just cut it for a fraction of the original projected loss
and wait the next opportunity.

stop loss

If you would
have waited for the price to go your way in hope you would have taken a full
loss as you can see in the chart above. Capital preservation should be your
priority in trading and this risk management tip can help you with that.

This article was written by Giuseppe
Dellamotta.



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