Trading Styles of Renowned Market Legends
- Strategic insights from legendary traders
- Practical ways to implement these trading methods
- Key benefits of using these tested styles
- Cautionary notes for applying each strategy
As traders gain market experience and begin interpreting market signals with greater accuracy, many develop tailored strategies through research and trial. Over time, some of these unique approaches deliver consistent success and when others catch on, these once-private strategies evolve into market-wide methods used by traders seeking similar results.
Let’s explore some of the time-tested trading strategies of legendary market players and the principles behind their success.
Paul Tudor Jones: The Macro Mind with a Focus on Risk
Founder of Tudor Investment Corporation, Paul Tudor Jones built a billion-dollar empire by focusing on macro-level market trends and risk mitigation. His firm manages over $38 billion in assets, while his personal net worth exceeds $7 billion.
His Trading Philosophy:
Jones tracks capital flows across global markets to uncover how movements in one sector might signal shifts in another. By doing so, he trades based on broader swings rather than short-term fluctuations.
One of his most defining moments came in 1987 during the infamous Black Monday crash. While most incurred significant losses, Jones accurately predicted the crash and earned a staggering 60% return that month and 200% over the year.
Tools and Techniques:
200-Day Moving Average (DMA): Jones frequently uses this long-term indicator to guide his swing trades. His 1987 short was triggered by the market dipping below the 200 DMA.
Risk-Reward Ratio (1:5): For every $1 risked, he aims to earn $5. Even with only 20% trade success, this allows him to remain profitable.
Risk Over Reward: He advocates focusing on risk management more than speculative profits stating that success lies in reducing exposure, not chasing high returns.
Jesse Livermore: Early Entry and Trend Confirmation
Jesse Livermore, often hailed as one of history’s great traders, emphasized catching trends early but only once they were confirmed by the market.
His Trading Style:
Livermore believed the real profits lay in entering a move near its origin and holding until the trend played out. He stayed away from sideways or low-volatility stocks and based his trades on clear patterns and trend confirmations.
Livermore’s Entry Checklist:
A trend backed by exceptionally high volume
Consistent directional movement over a few days
A temporary dip in volume and minor price reversal (a “normal reaction”)
Renewed momentum and volume supporting the original trend direction
When this sequence repeated, it was his cue to enter. If not, he considered it a warning sign to stay out.
Darvas Box: A Structured Breakout Approach
The Darvas Box strategy, created by Nicolas Darvas, is built on reacting to breakouts rather than predicting them. It emphasizes disciplined entries in stocks that are emerging from a consolidation phase into strong upward trends.
Key Rules of the Darvas Box:
The stock hits a new 52-week high
For the next three days, the price doesn’t surpass that high
The high becomes the top of the box, and the most recent low marks the bottom
A buy trigger activates once the price exceeds the box top by a few points
A sell trigger is set if the price dips below the box bottom
Additional positions can be added as new boxes form
When It Doesn’t Work:
During bear markets
In sideways or range-bound markets
If the stock is trading close to its 52-week low
Without strict stop-loss management
The Darvas Box strategy thrives during strong bull markets but requires disciplined execution to mitigate risk.
Turtle Trading: Rules, Not Emotions
Developed by Richard Dennis, turtle trading was born out of the belief that anyone can trade successfully by following strict rules and eliminating emotional bias.
Dennis taught this method to 14 handpicked students dubbed “turtles”funded them with his own capital, and instructed them on a rigid system designed to remove subjectivity from trading.
Core Principles of Turtle Trading:
Markets to Trade: Only liquid markets S&P 500, currencies, metals, bonds, and commodities.
Position Sizing: Use a volatility-based sizing algorithm to standardize trade exposure.
Entry Systems: Trades are triggered by either a 20-day or 55-day breakout.
Stop-Loss Discipline: Every position requires a predefined risk limit.
Exit Rules: Avoid exiting too early. Let profits run until the trend clearly reverses.
Tactical Execution: Learn when to use limit orders, how to handle fast markets, and most importantly, how to remain patient.
The essence of this strategy lies in strict rule adherence and the removal of emotion from decision-making qualities that separate consistent traders from impulsive ones.
Linda Raschke: Tactical Short-Term Execution
Linda Bradford Raschke, with over 35 years in the markets, is celebrated for her precision-focused, short-duration strategies. Her trades often lasted 10–15 minutes, with 3–4 executions per day.
Her Three Signature Strategies:
1. The 80-20 Strategy:
This approach identifies false breakouts using intraday candlesticks. A candle with 80% body and 20% shadows (a “momentum stick”) hints at a potential reversal the next day.
Raschke’s process:
Wait for a 20-point move away from the close of the momentum candle.
Enter once the price returns to that close.
Target profit is 50% of the total candle length, with returns aimed toward the candle’s midpoint.
2. The Turtle Soup Strategy:
Not related to Dennis’ system, this strategy uses 20-day highs/lows to catch false breakouts:
Wait at least 3 days after a price reaches a high or low.
If the price breaks out but reverses back into the range, place a counter trade:
Buy 10 points above the broken low reentry
Sell 10 points below the broken high reentry
3. The Anti-Trading System:
This method focuses on trend continuation post-pullback, identified using the Stochastic Oscillator (7,10,3).
Rules:
Slow line determines trend direction
Fast line identifies end of correction
Enter when both align in direction
Trade is held for one day only
Set target at close of the day, and stop-loss at the extreme of the signal candle
Conclusion
These strategies represent a rich tapestry of experience, discipline, and market wisdom. Each trader be it Paul Tudor Jones, Jesse Livermore, Nicolas Darvas, Richard Dennis, or Linda Raschke crafted their style based on deep observation, tested principles, and personal conviction.