When you begin your investing journey, you may want to consider which strategy you’ll use. If you pay close attention to market reports, you’ll know that stock values fluctuate all the time.
One option investors may consider is timing the market in a way that maximizes their earnings, which is a complex investing strategy that's not guaranteed to work.
If you’re wondering whether you should try to time the market or stay the course, here are the options you'll need to consider.
What Does It Really Mean to Time the Market?
In market timing, you try to beat the stock market by predicting its movements and using them as a basis for buying and selling stocks. When the market is down and stocks are cheap, you might want to consider investing in a well-known company. However, once you start trying to predict the best time to sell, or end up selling too early or too often, you start timing the market. More practical,
Market Timing is the polar opposite of the usual buy-and-hold strategy you might consider when investing in a variety of mutual funds and index funds.
It’s important to realize that no one can successfully predict the future of the stock market each time and whether you decide to time the market or not, investing still puts your money at risk.
But could timing the stock market actually make things worse for your savings? A 2017 study shows attempting to time the market may even hurt your portfolio’s performance. Still, there are some investors who advocate for timing the market
A few decades ago, it was widely believed that the most effective way to analyze markets for trading was to determine the fundamentals such as the number of bushels in storage, current demand numbers, expected crop yield, etc. Many assumed that technical analysis was not helpful. The reasons given were that the price movement is random or that it ignores the fundamental factors of the underlying asset. The facts are just the opposite.
Many have realized that the old buy-and-hold strategy can be costly. There are many stories of those who have found that their portfolio only breaks even (or falls in value) after they have held it for several years. The 2008 financial crisis marks one of several historical periods in which investors lost millions. While it's always a good idea to be aware of a company's financial health and future sales/profit potential, today's healthy financial position and outlook can be very different tomorrow.
Technical analysis focuses on price movements and anticipates price direction based on its ebb and flow (i.e. swings, cycles, etc.)). The fundamental factors of any asset are built into price action as the market discounts everything. Also, history tends to repeat itself and this repetitive nature of price movements can be anticipated and exploited.
Many technicians rely on various indicators to help uncover some aspects of historical price data for usage of time. Where one indicator might highlight an underlying cycle pattern that could help anticipate the next period of a trend reversal, another indicator might highlight an overbought or oversold state of the market, all relative to previous price action. The technical analyst relies heavily on price charts. Certain patterns repeat themselves often, giving the technician an indication of a potential price breakout. These patterns are given names such as B. the "head and shoulders" pattern, the "wedge" or "flag" formation, etc. All of these technical approaches are useful to some extent.
Accurate market timing is crucial in today's volatile markets. Without greater precision in timing, the trader is exposed to more risk and can leave more profit on the table.
Lets illustrate this.
For discussion purposes, assume that the price range is 50 points for each trading day. If your allowable risk (how far you allow the market to move against your position) is 50 points, you should enter the market on the exact day you expect the move in your favour to start to avoid that you will be stopped at a loss. If your allowable risk is 100 points, you need to keep your time accurate to within +/- a day or stop at a loss. This underscores the importance of accurate market timing.
Now, in the real world, the price range varies from day to day. Depending on how effective your market timing approach is, you may be able to risk less than the average point spread. The more imprecise your market timing approach, the more risk you should take initiative on the trade.
While market timing itself can be done flexibly using standard technical indicators, trend lines and moving averages, accurate market timing can be achieved with good market forecasting methods. Market forecasting for market timing purposes is extremely effective because unlike most technical indicators, which are “leading” or “lagging” in nature, a good market forecasting technique can predict a market reversal, an exact day of a trend reversal. Adding a small margin of +/- a day to each market forecasting method can give any trader an incredible advantage in predicting market movements in order to accurately time and trade the market.
Some traders are historical legends who have used market forecasting methods for precise market timing purposes. Who hasn't heard of William Delbert Gann (better known as WD Gann)? This financial trader is famous for developing various technical approaches such as using Gann angles or the trend indicator. His forecasting methods included the use of the square of nine, cycle analysis and market geometry. By using "market forecasting" tools like this and others, he is said to have often turned a small amount of money into a large one quite quickly. So there are two main points:
Point 1: is that you need to be more precise with your market timing approach to better manage your risk and maximize your profit potential.
Point 2: is that the most accurate way to time the markets is to use market forecasting techniques, which often allow you to time your trades exactly on the day of a new move.
There are many market forecasting secrets, methods, and techniques you can learn right now to speed up your time to market. Some are good, some not so good. I've spent over three decades learning, testing, and discovering market forecasting approaches. When I started there wasn't as much as there is now. So it has definitely seen some growth over the years and as such you should have no problem finding the approaches that suit your trading and investing style.
Remember, according to Mark Rieppe "Market timing is impossible to perfect." just make sure to make exceeding more profit than losses as a zero loss record is impossible
Thanks for reading, see you in my next post