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”, Paul 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.”
For example, say you get a catalyst and you open a long position on some instrument. If you don’t see momentum building in your favour and the market just stays there or starts going against you, chances are you are wrong. If you expected a certain reaction but the market doesn’t follow through, then why keep the risk just in hope.
In such a case, it’s better to just cut out the trade and wait for the next opportunity. When you are right, you will see the momentum increasing and going in your favour. From a trading perspective, it will give you an “instant” feedback on your idea.