Market timing are the two most dangerous words in investing – especially when practiced by novice traders.
Market timing is the strategy of attempting to predict future price movements through use of various fundamental and technical analysis tools – and when used to predict trending moves, ends in disaster, and losses.
Many investors feel that market timing is the same as trend following and the two go hand in hand, they don’t.
- Trend Following and Market Timing
Trend Followers REACT to market movement and act on these moves when they occur.
Traders who believe in Market Timing think they can PREDICT turning points in advance and buy at a low or sell at a high.
This is impossible to do; no one can predict the market.
Market timing advocates “buy low and sell high” but this is not the way to make money from trend following.
- The Real aim of Trend Following
To increase your chances of success in trend following you need to wait for confirmation of a move and for a trend to develop.
You are going to miss the start of the trend and not buy the bottom or sell the top, but this is hindsight.
By waiting for the confirmation for the trend to develop, the probability of the trend continuing and you getting a proportion of the profits are vastly increased.
The real way to make money don’t predict wait for confirmation!
The real way to make money is by “buying high and selling higher” and “selling low and buying lower” You will have far less losses this way and still make healthy profits than if you try to predict with market timing techniques.
Market timing is doomed to failure – as the market never does exactly what we expect, and no scientific law governs the market (despite what the followers of predictive theories such as Gann and Elliott wave might tell you).
We are only dealing with probabilities – not certainties.
Trading is an odds game and your entry and exit levels from the market need to reflect this.
This means trading only when the trend is underway and likely to continue.
- Dealing with Volatility
When dealing with market timing many traders are attracted to it as they feel it controls risk.
One of the major problems for traders is when they enter a trend in motion and they get stopped out.
The most effective way of entering a trend is a breakout method, but very often the trade dips back stops out the trader and then goes back they way they thought, but there is a solution:
- Enter the Trade with Options
Options give you staying power to ride out short-term pullbacks against you, but you need to know how to use them correctly and this means:
1. Buying in the money or close to the money options 2. Make sure you have plenty of time value on your side
This will increase your chances of success dramatically; give you staying power, limited risk and unlimited gains!
The best Method, Market and Vehicle for Trading
The best method to get in on a trend is a breakout method (read our other articles for more information on why) the best vehicle to control and manage risk on entry is options.
Finally, the best markets with the best trends to lock into for profit are:
The global FOREX markets, all the major currencies offer great long-term trends, many of which last for years.
These trends last so long that you can forget trying to predict with market timing and just take a proportion of the trend, which will still give you big profits over the longer term.
As you can see market timing is misunderstood and has nothing to do with making money from trend following and actually creates risk, rather than reducing it.