Why Time Stops are One of the Greatest Risk Control Tools

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 nights perfecting the timing of our trades. We write algos, we test strategies, we pour over charts. 📉🕵️‍♂️

But 99.9% of our time, retail traders focus on entries. 🛑 Exits are always relegated to price. We look to trade with fixed exits, scale out exits, scaled-in exits, and every trick imaginable in inventory management.

Except one. 🧩

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 may be one of the greatest risk control tools in the markets that is 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 the 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 reason after reason for being short. A few weeks later, Schwager catches up with Jones and, much to his surprise, discovers that PTJ is no longer short. 📉🔍 Jones tells 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 1980s, but after the '87 crash, turned bearish and stayed bearish through Dow 4,000, Dow 10,000, and Dow 20,000 -- 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. 🧠 Will you miss out on some profit if you use a time stop? No doubt. Will you escape many unnecessary stop outs? 100%. ✅🏃‍♂️

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