More on Market Timing

Markets Go Up, Markets Go Down
Markets go up, markets go down.

It shouldn't matter much, but many new market timers find that their own personal mood fluctuates with the markets, moving from extreme euphoria as the markets soar to new heights to deep despair when the markets plunge to abysmal lows.

Why do market trends have such power over emotions?

They don't need to, but many new market timers have difficulty cultivating an objective mind set.

Following The Masses

By allowing fear and greed to influence their trading decisions, new timers tend to follow the masses, and when they go with the crowd, they soon find that market trends not only influence their moods but their account balance as well.

There's a strong tendency to follow the crowd. There is a feeling of safety in numbers. When you see a steady upward trend, you feel secure. Everyone is buying.

They are all doing the same thing. When other people offer confirmation of your decisions, you feel safe and assured.

In a bull market, it isn't so bad to follow the crowd. When it's a strong bull market, the crowd is often right, and it makes sense to follow them. However, when the market turns around, feelings of safety and security can turn instantly into fear and panic.

Humans Tend To Be Risk Averse

Why? An obvious reason is that many new market timers don't have the ability or financial resources to sell short, and take advantage of a bear market.

But there's a psychological issue as well. It is difficult to know how to handle falling stock prices. For example, humans tend to be risk averse.

When one is in a bullish position and the markets suddenly turn, it's hard to accept losses, and even harder to execute that sell signal, issued by your timing strategy, before more damage is done.

Denial and avoidance set in. At that point, a market timer with a losing position panics, hopes that things will turn around, and waits for events that are unlikely to happen.

Usually the price continues to fall, heavy losses are incurred, and as expected, disappointment and despair set in.

Detached And Relaxed

It's vital for your survival as a market timer to stay calm and objective. Don't let your emotions interfere with your decision-making.

How do you stay detached and relaxed?

First, following a non-discretionary timing strategy and knowing, absolutely, that over time it will be profitable, helps you to rise above strong emotions and allow the strategy to make the decisions.

Second, accepting the fact that you'll likely see many small losses as a market timer and that you should expect to see the markets turn against you. What is important is NOT to react like the rest of the crowd. Staying above the fray is the key to profitability and knowing that the money management rules built into your strategy will keep losses small and allow profitable positions to run as high as possible.

Third, think of the big picture; the long-term profits across a series of trades are all that matters, not the result of a single trade.

Develop A Logical Mind set

Don't allow your moods to fluctuate with the ups and downs of the markets.

By trading in a disciplined, methodical manner, you can cultivate an objective, logical mind set that isn't overly influenced by market moods.

Armed with the right mind set, a disciplined trading approach, and a tested market timing strategy, you will be able to realize the huge profits of winning market timers.

http://timing.typepad.com/timer/
 
Ok, I agree most Timers don't beat the Market when it's trending up. But I'm not trying to beat the Market. However, some Timers do beat the market and I'm following some of them. In fact, we have some here at TSP TALK. HOW ABOUT THAT![/url]

Totally random guessing would have "some" beating the market.

Half of "mangers" being the market one year, a fouth of them beating it two years straight, and an eighth of the beating it 3 years straight....... on to just 1 or two who have a 10 year straight winning record (out of 1000s) could be completely explained by randomly picking stocks.

Now HOW ABOUT THAT? ;-)
 
Is Volatility A Four Letter Word?
The Main Ingredient

Considering the week just past, with 200 point swings almost a daily occurrence, we thought this article on volatility to be timely. The majority of investors see volatility as not only dangerous, but something to be avoided at all costs. They equate volatility with risk. But volatility and risk are two entirely different things.

To market timers, volatility is the precursor to profits. To have "no" volatility would be to have "no" profits.

In addition, to single out one period of time when volatility is causing losses, is to miss the big picture which shows that, over time, volatility is the main ingredient to making huge profits.

Controlling Profits?

Consider this example of volatility.

Let's say that you enter the market with a starting sum of $1,000 and the market enters a substantial trend and you are ahead by 30%. Your original $1000 is now worth $1,300.

Then the market reverses and you drop down to $1,150. Is this a reason to panic? If the trend is still intact, it is not. As trend followers, if we are still in the same trend, we may very well now move up to $1,500 or higher in short order. This is what trend following is all about... riding a trend to the end, not exiting at the first retracement.

But many traders would be devastated at dropping from $1,300 down to $1,150.

Too many market timers get upset for the wrong reasons. There is no way to control how profits are made. We can only ride the trends, as far as they will go, when they occur.

Market timers who follow trends have greater upside volatility than downside volatility because they "exit" losing trades quickly with small losses and "stay" with winning trades until the profitable trend ends. "The important thing to remember is that we stay with profitable trends, often for a long period of time."
The important thing to remember is that we stay with profitable trends, often for a long period of time.

When we start a profitable trend, we often make our profits in quick bursts of "volatility." That is why volatility is our friend, not our enemy.

We generate strong profits by correctly determining profitable trends and minimizing the cost of failed trends with quick exits.

When we have periods of sideways, non-trending markets, where there is no long term trend, we do not allow losses to accumulate.

When the market does break out into its next big trend, whether it be to the upside or to the downside, that is when we make our profits. And we do "not" exit the trend early. Exiting to protect profits assumes you "know" ahead of time when a trend will end.

No one knows ahead of time. So we "must" allow the trend to complete before we exit. That means we will catch the "majority" of the trend, when it occurs, as profits.

Huge Volatility Equals Huge Profits

Invariably, the best profits come with the highest volatility. That means as trend followers, we must react to changes in trends, stick to our guns and make all the trades.

We may have some small losses when trends fail, but when the market finally breaks out (or breaks down), we make huge gains by riding the new trend as long as it lasts, to the upside in our bullish only strategies, and in both directions (long and short) in our more aggressive strategies.
"Skeptics mistake the volatility, used by trend timing strategies to make profits, as negative. But the opposite is true."

By following a set of rules, we do not have to agonize over protecting an open profit, nor do we need to constantly change our strategies to find ways to reduce volatility.

The question is not how to reduce volatility, but how to manage it with proper risk management. This means "not" allowing failed trends to accumulate losses, and "not" exiting profitable trends early.

Skeptics..

Skeptics mistake the volatility, used by trend timing strategies to make profits, as negative. But the opposite is true.

There is a big difference between volatility and risk.

Many investors see them as the same. But embracing volatility while controlling risk (cutting losses) is the key to successful trend timing.

We may see periods when profits are nonexistent for months or more. We may have several failed trends that generate small losses. But successful trend timers see these periods as the base for the next huge profitable trend.

In fact, we know extremely successful market timers who get excited when they see periods of sideways, non-trending markets as they know what comes next. The next huge trend is right around the corner! The longer the sideways market, the more profitable is the coming trend.

Unfortunately, many who do not understand the logic of market timing by trading trends are not around when the big trends occur. They are sitting at their computers trying to find a new strategy that will guarantee gains while never allowing losses.

This is an impossible goal. Losses are inevitable. But so are the gains that are achieved by trend following strategies, taking the trades, minimizing the losses when trades (trends) fail, and riding the inevitable big trends for all they are worth when we get them.

http://timing.typepad.com/timer/
 
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Very nice article, Robo. The biggest rule my monkey uses is to always be in the market when the 75 day EMA is above the 180 day EMA. That's what I use for deciding the trend.
 
Friday, March 02, 2007
Fear Of Missing Out
When I look back at my short term trades, most of the losses were caused by fear of missing out. If you've traded for any length of time, the fear of missing out is something we've all experienced. It's almost as if we would rather lose money than to see that trade work without us being involved. Fear of missing out causes us to chase stocks, trade heavier than we should and maybe even trade scenarios that aren't part of our game plan.

So how do we deal with the fear of missing out? What works for me is to simply follow a trading methodology and have the discipline to stay with it. I've noticed when I am one step ahead of the market in terms of what I will do if such and such were to happen, I usually make money because I am in an anticipatory mode of thinking and my timing tends to be very good. However, there are times I get caught up in the excitement of a rapidly moving stock and I think to myself that I must get involved, so I chase it and of course we all know how that turns out. So following a trading methodology is a very good way to avoid the fear of missing out.

Another way to avoid the fear of missing out is to condition your mind into believing that it is more painful to lose money than it is to miss out on a trade that is not part of your game plan. This kind of thinking has been the biggest help for me. None of us wants to lose money. We all know how painful it is to watch our account diminish in value especially when we are losing money because we fear that we will miss out. The next time you get the urge to chase a stock, or enter a trade because the guy on tv said it will make a lot of money, you should take a deep breath and remind yourself how hard you've worked building your account. Remind yourself how awful you're going to feel if you were to lose on this trade which most likely will be the end result.. If you do this often enough, the fear of losing money will become greater than the fear of missing out and once that happens, you've used fear in a positive way to help your trading.

http://kevinsmarketblog.blogspot.com/2007/03/fear-of-missing-out.html
 
Trading Fears... We All Have Them. It's How We Handle Them That Counts.
All market timers, traders and investors, in every kind of market, feel fear at some level. Turn on the news one day and hear that a steep unexpected sell-off is taking place, and most of us will get a queasy feeling in our stomachs.

But the key to successful "profitable" market timing, in fact all trading, is in how we prepare ourselves to handle trading fears. How we prepare to deal with the risks inherent in trading.

Mark Douglas, an expert in trading psychology, says this about trading fears in his book "Trading in the Zone."

"Most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting in too high and too low and causing them to react emotionally, with excessive fear or greed after a series of losses or wins.

As the importance of an individual trade increases in the trader's mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.

All traders have fear, but winning market timers manage their fear while losing timers (as well as all traders) are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the "fight or flight" response. We can either prepare to do battle against the perceived threat, or we can flee from this danger.

When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to "freeze."

There are four major trading fears. We will discuss them here, as well as how to handle them.

Fear Of Losing

The fear of losing when making a trade often has several consequences. Fear of loss tends to make a timer hesitant to execute his or her timing strategy. This can often lead to an inability to pull the trigger on new entries as well as on new exits.

As a market timer, you know that you need to be decisive in taking action when your strategy dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your timing strategy. This causes a lack of trust in the strategy or, more importantly, in your own ability to execute future signals.

"When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process."

For example, if you doubt you will actually be able to exit your position when your strategy tells you to get the out, then as a self-preservation mechanism you will also choose not to get into a new trade. Thus begins analysis paralysis, where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.

Looking deeper at why a timer cannot pull the trigger, a lack of confidence causes the timer to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain.

No one likes losses, but the reality is, of course, that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game both financially and psychologically. The longer you can remain in the trading game with a sound timing strategy, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.

When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process.

By following a strategy that unemotionally tells you when to enter and exit the market, you can avoid the pitfalls caused by fear.

This, of course, is what we do here at FibTimer. We learned long ago that unemotional (non-discretionary) timing strategies save us during emotional times in the market. We know the strategies work, so we put aside our fears, and make the trades. "...good timing strategies are designed to guard against big losses"
And remember, you must be able to take a loss. Consider them as part of trading. If you cannot, you will not be around for the big gains because you will be on the sidelines guarding your capital against that potential loss.

Remember that good timing strategies are designed to guard against big losses. Every trade you take has the potential to become a loss, so get used to this reality and take every buy and sell signal. That way, when the next big trend starts, you will be onboard and profit from it.

Fear Of Missing Out

Every trend always has its doubters. As the trend progresses, skeptics will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend.

The fear of missing out can also be characterized as greed of a sorts, for an investor is not acting based on some desire to own the stock or mutual fund - other than the fact that it is going up without him on board.

This fear is often fueled during runaway booms like the technology and internet bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.

When you think about it, this is a very dangerous situation, as at this stage investors tend essentially to say, "Get me in at any price - I must participate in this hot trend!

The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a "promising" and "obviously beneficial" trend. But there's nothing obvious about it.

Remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality.

It is expectation gaps like this that often create serious risks for those who have piled into a trend late, well after it has been widely broadcast in the media to all investors.

Next week read part 2, the conclusion of this article on "Trading Fears."

http://timing.typepad.com/timer/
 
Thanks Robo for the read. I recognized myself in the articles. It remind me of my reaction last week. I lost some then I lost more. Mainly, I froze and failed react. The thing is taking the emotions out so you can react to whatever situation. You would not leave a steak on the grill to burn.:D

Thanks
 
Trading Fears... We All Have Them. It's How We Handle Them That Counts.

Part 2

Last week we looked at trading fears that can keep you from making the profits that experienced market timers consistently realize. Last week's Trading Fears Part 1 can be read by clicking here.

It is not the timing strategies that keep timers from being profitable, it is the fears, which we all have at one time or another, that keep us from making the trades. In Part 2 we look at more "fears" which must be overcome to be successful in the markets.

Fear of Letting a Profit Turn into a Loss

Unfortunately, most market timers do the opposite of "let your profits run and cut your losses short." Instead, they take quick profits while letting losers get out of control.

Why would a timer do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.

How should you take profits? At FibTimer we trade trends. Once a trend begins, we stay with that trade until we have enough evidence that the trend has reversed. Only then do we exit the position. This could be days if the trend signal fails, or months if it is a successful trend.

Does this sometimes result in small losses? Yes. If we have a false signal to start with it can. But we must look at market history to understand this trading concept. History tells us that while there are times when the markets trade sideways or make failed moves, once a real trend begins, it usually lasts much longer than anyone expects it to.

That means for the few failed trends, the real ones last a very long time, and generate huge profits. But because no one knows ahead of time which signal is the start of the next big trend, we must trade them all.

What happens in the short term can be accepted because we are assured of profits in the long term as long as we stay with our timing strategy. We do not try to quickly lock in profits. We stay with the trend until the trend changes.

This way we obtain every bit of profit that the markets will give us. And... we do not have to worry about locking in gains. We let the markets themselves tell us when to do it.

Fear of Not Being Right

Too many market timers care too much about being proven right in their analysis on each trade, as opposed to looking at timing as a probability game in which they will be both right and wrong on individual trades.

In other words, by following the timing strategy we will create positive results over time.

The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs.

Ego leads to equating the timer's net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.

Timing results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will not be able to stay with the timing strategy, but instead will allow your emotions to step into the timing process.

The ego's need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.

If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way in timing.

You can't be a perfectionist and expect to be a great market timer. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain.

The objective should be excellence in timing, not perfection. You should strive for excellence over a sustained period, as opposed to judging that each buy or sell signal must be perfect.

The great timers make losing trades, but they are able to keep the impact of those losses small. For the market timer who is dealing with excessive ego challenges, this is one of the strongest arguments for mechanical systems. With mechanical systems you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you executed your system's entry and exit signals.

Mechanical systems are all that we use at FibTimer. Years of trading experience has taught us that there is no way to keep emotions from affecting trading, except by following unemotional, non-discretionary strategies.

Conclusion

As a market timer, you must move from a fearful mind set to a mental state of confidence. You have to believe in your ability to execute every trade, regardless of the current market sentiment (which is often at odds with the trade).

Knowing that the timing strategy you are following will be profitable over time builds the confidence needed to take all of the trades. It also makes it easier to continue to execute new trades after a string of small losing ones.

Psychologically, this is the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their timing strategy.

And typically, when trader's pull the plug and exit their strategy, it is exactly at that time that the next profitable trend begins.

Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul.

As you focus on the execution of your timing strategy, while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, gain confidence in your timing strategy, and over time become a successful (profitable) market timer.

http://timing.typepad.com/timer/
 
I owe this website so much in increasing my comfort as to taking an asset allocation/diversification approach. Tom who hosts the main page easily has 3 times the market knowledge that I do, and obviously spends a great deal of time analizing the options, yet he's sitting in G fund on yet another bull run.

Seeing yesterday's results, and reading Tom's article today was a turning point for me. A turning point from "thinking" diversification was probably the best approach to just outright knowing that it is.
 
So glad we could be a source of comfort. After all, that's what buy and holders are all about, comfort. Sleep well. Don't worry, be happy. Don't even think about the market.

Hmmmm..... Why are you here? Wondering if you are doing enough for retirement? Remember: Don't worry, be happy. Don't even think about the market.
 
I owe this website so much in increasing my comfort as to taking an asset allocation/diversification approach. Tom who hosts the main page easily has 3 times the market knowledge that I do, and obviously spends a great deal of time analizing the options, yet he's sitting in G fund on yet another bull run.

Seeing yesterday's results, and reading Tom's article today was a turning point for me. A turning point from "thinking" diversification was probably the best approach to just outright knowing that it is.

Reminds me of that song.... Smug, the Magick Dragon :nuts::D
 
Good to hear from you Azanon. I know what you are saying, and I have made the same mistakes time and again thinking too much about which way the market will move, anticipating its next move down or up.

It’s hurt my TSP account in the long run. The returns in my TSP account are below those in my other investment accounts. I'm beginning to think it’s an affliction. I'm a “market junkie”, waiting for my next fix. Ah, the euphoria and exhilaration of being 100% in the market when it’s shooting up. Will the market be up or down, next week, next month?

Not everyone visiting TSP Talk is trying to time the markets. A good many in our tracker maintain a fixed allocation among TSP funds. The passive investment approach is a good method to get the market returns since, in the long run, markets are up. The personal involvement and energy is minimal in maintaining a fixed fund allocation.

I hope you see the humor in my analogy of market timing behavior with an affliction. It does make one pause, “Am I a market junkie?”.
 
Seeing yesterday's results, and reading Tom's article today was a turning point for me. A turning point from "thinking" diversification was probably the best approach to just outright knowing that it is.
What were you "thinking" 3 weeks ago? You seem to only pop in when it's convenient for your agenda.

Sorry folks. I don't normally talk to our members like this but this guy only shows up when he's looking to dog me and TSP Talk.
 
Identify him/her as best as possible and let none of us here pay any attention to the pestering. it seems to be very badly intentioned.
 
Tom,

Azanon's agenda is apparent and obvious.

As he lack's any real or substantive contribution, he is left with sarcasm to try to appear relevant.

To those who would detract, what is the monument to their achievement? I haven't noticed their websites dedicated to helping inform on the importance of involvement in managing matters related to retirement.

Turkeys abound....
 
Instincts vs. A Market Timing Strategy
Humans are born with basic instincts for survival. They need to protect themselves at all costs.

Certain critical instincts are inborn, such as hunger, self-survival, etc. But humans are complex creatures. We also have learned instincts, habitual ways of behaving that are so automatic and unconscious that they seem as if they are part of our very fabric.

Acting Without Thinking Logically

For example, as you drive in traffic, you "instinctively" slow down or change lanes when the car in front of you seems to be driving erratically.

You may have noticed that many drivers will make the lane change to avoid slowing down, and will even speed up to pass to take advantage of everyone else slowing down.

People react "instinctively." Some act without thinking "logically" about their options, without taking steps to avoid possible danger. They often tend to make poor decisions.

Behavioral economists have demonstrated that people also make automatic, unconscious decisions when trading the markets.
"Only over time are substantial profits realized, and only by those market timers who stay the course."

Most people are extremely risk averse. They enjoy the pleasure of a sure win, even a small one, but try to avoid the pain of losses at all costs. Yet there is no logical reason to show such an asymmetry regarding their decision making.

Investors also sell their winning trades prematurely so they can lock in their profits.

These unconscious and automatic decisions reflect a strong and universal human desire to avoid risk.

At FibTimer, all of our strategies are non-discretionary. Emotions are not allowed. Our strategies offer disciplined execution of non-emotional buy and sell signals.

The reason for following any timing strategy is to "remove" yourself from making emotional trades. To remove yourself from the herd, which is often headed in the "wrong" direction. Towards the nearest cliff.

Playing It Safe

As humans socially evolved, they learned to protect their survival by playing it safe.

Playing it safe may be prudent for very long-term investors, but for shorter-term investors... those who are unhappy with the losses incurred during numerous inevitable downtrends and who wish to avoid those losses or to capitalize on the downtrends, fear of risk and uncertainty is an impediment to success.

It is necessary to identify this need for safety and security and "reprogram" yourself to work around it.

Following The Masses

A common illustration of risk aversion happens when market participants follow the masses, as if they are wild animals banding together as a herd for protection.

They look toward others for direction, regardless of the consequences.

Over the past few weeks, for example, stock prices sold off dramatically. People following the herd participated in the selling with huge numbers selling near the bottom.

As more and more people saw prices drop, more and more participants sold. What else could they do? It is scary to see your investment values plummet.

"You must "reprogram" yourself to think outside the box."

Is the news going to get worse? Will the prices reach even lower lows?

Most people are afraid of pain. They are afraid that the price may go even lower, and they sell because they don't want to lose even more money.

Of course not all investors will sell. Some will become so panicked that they will be afraid to acknowledge their losses and want to leave them on paper, hoping that the prices will return to previous levels in the coming weeks. During a bear market this can be an even worse decision.

The masses try to avoid risk and pain, and by doing so, they tend to behave automatically.

Devoid Of Emotions

Active, serious market timers, in contrast, react more decisively.

They carefully follow a trading strategy that is completely devoid of emotions. They follow through on buy and sell signals with absolute precision.

They know that any one or more buy or sell signals may be wrong, but they realize that to trade profitably they must learn to trust their timing strategy and act on it. Only over time are substantial profits realized, and only by those market timers who stay the course.

Think Outside The Box

If you want to be a winning market timer, you must learn to identify your need to follow the masses, and teach yourself to avoid doing what your need for security compels you to do.

You must "reprogram" yourself to think outside the box. Rather than follow the masses, you must follow your timing strategy, which may be contrary to what most people would do.

Over time, and with extensive experience, you will develop the skills that will allow you to trade decisively.

Once you have "reprogrammed" your behaviors, you will not be tempted to follow the masses, but will instead recognize these feelings for what they are. Instincts for survival, which may work in the physical world, are likely to cause poor decisions and loss of capital in the financial world.

Rather than following the masses, you must learn to follow a timing plan, which is not affected by the emotions of the masses.

The more decisively you can follow the timing strategy, the more profits you'll realize.

http://timing.typepad.com/timer/
 
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