It is correct to approach market timing with a positive attitude, as well as positive expectations. To feel confident that your strategy will not only be quite profitable, but will also protect you from the inevitable declines that always occur in the markets.
However, I am concerned that some market timers take an unrealistic approach.
Elevated Expectations
The unrealistic approach to market timing is to expect instant gratification. To have the expectation of immediate gains; that losses are not only "not" something to be expected, but also "not" to be tolerated.
Part of this is caused by unrealistic advertising promises, by trading services in advertisements, found all over the internet. But part is also caused by investors wanting to believe that easy money is there for the taking.
There is no easy money. Market timing works, but it takes time, commitment, patience, and the ability to stick to a strategy even when friends, TV commentators and news events are pressuring you to do the opposite.
Minimizing Unpleasant Consequences
Many new market timers approach the markets with a tendency to minimize the very real potential for unpleasant short-term consequences and to be overly optimistic.
Do you remember Yale economist Robert Schiller's book "Irrational Exuberance?" Published in the year 2000, it was widely criticized. At least it was until the bear market chopped 50% to 80% off the S&P and Nasdaq (and off many portfolios).
Apparently, lessons learned from history quickly disappear from the minds of Mr. Schiller's aptly described "irrational" investors. Many quickly forgot the harsh lessons of the bear market of 2000-2002.
Now of course investors are again aware of the potential for losses in the financial markets after watching 50% loped off stock values in 2008. But as time passes you will always see irrationality return. It is human nature.
Long-term planning is unimportant to the irrational investor. Yet interestingly enough, market timing actually defines long term planning.
The setting in motion of a plan to grow your investments over time, and to protect them from losses, is the opposite of speculative trading.
We hope no FibTimer subscribers fall into the trap of having elevated and irrational expectations. Almost every week we write commentaries designed to help our subscribers know what to expect, so that they are prepared for whatever the market throws at us.
Market timers with elevated expectations will abandon a strategy after a small loss. As a result, they wind up locking in those losses without giving the timing strategies, which work quite well over time, a chance to perform.
Having expectations that are unlikely to be met is a sure fire way to making poor emotional decisions, always at the wrong times, and usually creating losses that should never have occurred.
Below is a list of several common irrational and overconfident traits.
Irrational Traits
Don't Be Swayed By Crowd Psychology
The "majority" of investors are the most bullish at market tops and the "majority" of investors are the most bearish at market bottoms. Just look at the huge spikes in trading volume during those times.
And remember, this is not just something that happens to the other person.
Each trader is absolutely sure of his or her position, and if they can talk you into following them, you will be one of the many tens of thousands who "buy at the top" or "sell at the bottom."
In short, don't be swayed by crowd psychology. It is often the very opposite of what you should be doing.
That is what market timing is designed to defeat. Market timing offers unemotional decisions, issued by a tested strategy, replacing emotional ones.
Lastly, understand that market timing does not mean market forecasting!
At Fibtimer we identify and trade trends. This is not forecasting and no crystal balls are used. We use time tested strategies that have profited for many many years in real-time trading and through two severe bear markets.
It has been said that "Nothing will stop the truly irrational investor." Hopefully that is not always true.
January 26, 2012
Shares of the ETF Market Vector Biotech (AMEX: BBH) are in the middle of a huge rally.
Amazingly, BBH has now closed above its March 3, 2000 rally closing high of $121.38.
How high can this volatile ETF go? There is no way to tell but new highs are bullish until they are not. In other words, trade the rally but keep a sell stop just in case it ends, and they always do.
There is strong support at $121.33, the January 24 intra-day low. Interestingly this is within pennies of the march 3, 2000 closing high.
A stop below $120 would give a low risk trade.
The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy holds a position in Market Vector Biotech.
January 24, 2012
Shares of Intel Corp (NASDAQ: INTC) are testing an important resistance level at $16.71 a share.
Intel is a semiconductor chip maker, which develops advanced integrated digital technology products, mainly integrated circuits, for industries such as computing and communications. It is a bell weather in the semiconductor sector.
Intel has reach ed the $16.71 level several times over the past days and pulled back. $16.71 was the closing high reached back on July 26, 2011 and right before a huge decline erased 25% of share value.
A close above $16.71 would be a breakout for shares on Intel and we would expect the stock to rise until the $18.25 to $18.50 level, which was the top for prices for almost a year from mid-2010 to mid-2011.
The Fibtimer.com (http://www.fibtimer.com) Stock Timing Strategy currently has a position in Intel.
Historically, The Markets Are Usually In Trends
Trend traders depend on change to make their strategies work. Simply said, a market that just goes sideways can not be timed. But a market that trends up and down can be.
History shows us the financial markets are usually in trends. You can go back hundreds of years. You can look at stock markets, commodity markets, Dutch Tulips, you name it, they are more often in trends, than not in trends.
History also shows us that trends usually last much longer than anyone expects.
For example, after a huge upward trend through most of the 1990s, the U.S. stock markets were in a down trend (bear market) from 2000 into early 2003. Any chart can easily show you the trends.
For the next several years, into 2007, the financial markets were been in a solid uptrend. Then again we suffered through another downtrend but Fibtimer subscribers "made" money, instead of taking the 50% losses that most investors suffered.
Over all, financial markets are in defined trends about 80% of the time. This has been the case for many, many years.
Sideways Markets Are Actually GOOD news
But what about those sideways times? The times that try our patience and our will?
The good news is that sideways markets are always either the base or the top of a new trend. That means the next trend is around the corner when we are enduring a sideways market. We just have to make sure we are on board and profiting when it happens.
That is where trend trading comes in. We establish a set of rules that identifies when a trend has begun. If the trend fails, we exit. If it continues, we stay with the trend no matter how long it lasts! Months... even years. After the trend fails, according to our preset rules, we exit.
Cut your losses short and let your winners run. Ever heard that saying?
Think about how powerful such a trading strategy is. You never miss a trend, either up or down. At tops and bottoms you may get some small whipsaws as the market becomes volatile and false trends occur as the markets consolidate and decide which way the next trend will go.
If we encounter a whipsaw, it will result in either a minor loss or small gain because our money management rules, built into the strategy, do not allow losses to build. But that whipsaw is just the precursor to the next trend. In fact, they could be considered exciting times because we KNOW that they are just setting up our next big trend and big profit.
80/20 Rule
Have you ever heard of the 80/20 Rule, also known as the Pareto Principle? Dr. Joseph Juran developed the Pareto Principle after studying the work of Wilfredo Pareto, a nineteenth century economist.
The Pareto Principle states that a small percentage of your efforts (typically around 20 percent) will create a large majority of your results (usually around 80 percent).
Expanding Pareto to trading, it follows that roughly 80% of your profits should come from only 20% of your trades.
That means there likely will be numerous small trades that achieve little, but that only 20% of the trades you make will make nearly all of the profits.
Think how import that makes every trade!
After a small loss it is human nature to feel like giving up. This is the psychological battle that market timers MUST win!
The markets are powered by emotions (fear and greed). But trend traders use the changes caused by those emotions, to make their profits.
If you give in to those emotions, you lose!
Here at FibTimer, where we have been market timing for over 20 years (since 1982). We always know when a new trend with huge profits is near.
Subscribers become nervous. Financial news becomes overly positive or negative. The number of reasons why the markets cannot go higher (or lower) increase.
Soon after is when the big trade occurs, and we make our big profits for the year.
It happened during the bull market top in 1999-2000. The ensuing decline, a strong and powerful trend lasting over two years, realized a 100% gain as the stock market collapsed.
It happened in March of 2009 when everyone was bearish, but our buy signals in that month put us into the beginning of a market advance that lasted a full year with well over 50% gains.
Think about the 2008-2009 bear market. Even our conservative subscribers were 50% ahead of the buy-and-hold crowd because they were in money market funds missing the entire decline.
Conclusion
Knowing that you will be on the correct side of every "trend" means you will be in the next rally or bull market; or out of the next steep decline or bear market.
These are more than just comforting thoughts. They are critical to profitable strategies in troubled times.
January 20, 2012
Two weeks ago we wrote that shares of Texas Instruments (NYSE: TXN) had been in rally mode since reversing off support on December 19, 2011.
On Wednesday, January 18, share prices broke out to new rally highs and closed above the July 5, 2011 rally high. Since we wrote the last report TXN has rallied 10%.
TXN has also surpassed a declining trend resistance line on the daily chart. This line is drawn by connecting the closing highs at $31.79 on November 4 and then $30.67 on December 7. The current advance has closed decisively above this resistance line.
Look for TXN to test the prior 2011 highs at 36.56, reached on March 3, 2011, in coming weeks.
Strong support is at $32.00 a share.
The Fibtimer.com (http://www.fibtimer.com) Stock Timing Strategy holds a position in Texas Instruments (NYSE: TXN).
January 11, 2012
Shares of the Texas Instruments (NYSE: TXN) have been in rally mode since reversing off support on December 19, 2011.
This support level was the prior correction low established November 25 at $27.79.
The current advance comes off a double bottom.
TXN has also surpassed a declining trend resistance line on the daily chart. This line is drawn by connecting the closing highs at $31.79 on November 4 and then $30.67 on December 7. The current advance has closed decisively above this resistance line.
In trading on Tuesday, January 10, TXN is up 1.3% and while the major indexes have pulled back from their midday highs, TXN is near its highs at the close.
Strong support is at $28.00 a share.
The Fibtimer.com (http://www.fibtimer.com) Stock Timing Strategy holds a position in Texas Instruments (NYSE: TXN).
The term "impulsive" is often used to describe people who can't wait. They can't delay; they've got to have it now. So they are willing to forgo something better that comes later in order to get something right away.
This is NOT a trait you want to have as a market timer.
If someone offered you a choice between a smaller amount of money ($100) available immediately and a larger amount ($1,000) that could be received after a specified delay (3 years), which would you take?
You would be surprised at how many would take the $100. In fact, a great deal of the buying and selling going on in the stock market every day is by those who are looking for that quick $100. Very few are thinking about the $1,000 and even fewer have a strategy to achieve it.
Why is it people engage in behaviors, the long-term consequence of which is worse for them? Why do you have that incredible chocolate cake right "now" when you're trying to lose weight, or trying to stay healthy, or trying to stay fit?
One of the reasons is that being healthy or being fit is a "delayed reward." It occurs later.
While the desire to succeed in market timing is perfectly fine, the desire for immediate profits and instant winning trades is not. It clouds the real goal. Making large profits over time. A goal few investors ever achieve.
Motivated By Immediate Rewards
The market is unlikely to hand "immediate awards" to you. Although market timing is all about being profitable, it is not about satisfying our emotional needs. Rather, it is the following of a rational plan to create wealth over time.
A winning market timer must tirelessly execute a trading strategy that will often come into conflict with the timer's emotions.
The outcome of any one buy or sell may not produce a profit. It's quite possible that the overall outcome of a series of buys or sells may not produce a profit. It is essential that these possibilities be acknowledged.
People are motivated by rewards and in modern society that usually means money. The more money we are offered, the harder we work.
Perhaps you were attracted to market timing because of the large potential profits you would make in the future. It's natural to want to receive a reward for your hard work. But if you expect an immediate reward for your effort and it isn't forthcoming, you'll be frustrated and disappointed. And when it comes to market timing, immediate rewards aren't always there.
For example, everyone expects to get paid on the date their paycheck is due, but have you observed what happens when a paycheck is late? Everyone is quite frustrated and some people can get very angry. People were expecting a hard earned reward but received no reward.
Unless one has the right perspective, market timing can feel that way also. One may put in an enormous effort and receive no "immediate" reward for it.
If one is "expecting" an immediate reward, it can be frustrating and disappointing when it does not appear. That is why it is important to take the proper perspective with market timing, and the proper perspective can only be based by looking at timing results over a fair time frame.
The Big Picture And Laws Of Probability
It is essential for a market timer to think in terms of the big picture, and in terms of probabilities. You must realize that the outcome of any one buy or sell signal is not significant. It's the outcome over time that matters.
Market conditions, as we all know, are not always conducive to our plans. This is a reality of market timing and it's necessary to prepare for it. If you are aware of this, you'll be less likely to react emotionally to losing trades, and also less likely to make bad decisions when they occur.
Seeing the big picture, and sticking to the trading plan, are the keys to timing success.
Conclusion
If you anticipate that you won't win on a buy or sell signal, you will not feel disappointed when it happens.
But on the other hand, if you aren't prepared for this possibility, you'll feel frustrated and disappointed. You may feel like giving up on timing.
Some market timers hit the jackpot and start right at the beginning of a profitable trend.
But typically, we start our market timing during difficult market conditions. When we are looking for ways to profit that we so far have not realized.
The right perspective goes a long way in coping with the inevitable hard balls that the market throws at us.
Those who stay the course reap the rewards over time.
January 6, 2012 (FinancialWire) (By Frank Kollar)
Shares of the ETF Powershares Nasdaq 100 QQQ Trust (NYSE: QQQ) broke above and closed above its prior rally closing high of $57.24 (December 5) on Thursday, January 5 by closing at $57.61.
The QQQ has also closed above both its 50-day moving average and its 200-day moving average. Both moving averages were surpassed in Monday’s gap-up open and subsequent rally.
The QQQ has not been a market leader as is often the case in a new advance. The big-caps have so far led the rally with the S&P 500 SPYDRs (SPY) the strongest diversified big cap ETF.
A long position for the QQQ with a sell stop at just below $54.00 would be a low risk entry point for a potential rally ahead.
The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy holds a position in the Powershares Nasdaq 100 QQQ Trust.
January 4, 2012
Although the S&P Deposit Receipts (NYSE: SPY) was unable to close at its highs in Tuesday’s start of the New Year rally, SPY did close at a new short term high.
The close, at SPY $127.50, was above the December 7 closing high which was followed by two weeks of declines.
Still ahead is resistance at SPY $128.60, the October 28 closing high and the highest closing level reached since the steep August selloff.
A solid close above SPY $128.60, less than one percent higher, would be a bullish event and would also be the first sign of legitimate market strength in half a year.
Currently support is at SPY $120.00 and we are watching for a potential breakout in coming days. A failure here would be extremely disappointing.
The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy does have a current position in the S&P 500 SPDRs.
The fact is, all traders, investors, and yes market timers, feel fear at times, at some level.
What is important is how we address it. Knowing the definition and reasons for fear can actually help market timers to overcome it.
Traders "Believe" They Know The Future
In the book "Trading in the Zone" by Mark Douglas, he describes how most traders "...believe that they know what is going to happen next."
This can cause market timers to put too much importance on the "current" trade, and to lose focus on their performance over time.
But market timing is based on "probabilities" that make us successful over time. Too much focus on a single trade causes the fear levels to rise. As this occurs, market timers become hesitant and cautious, trying to avoid mistakes. The risks of choking under pressure (not making a trade) build.
All market timers, at times, feel fear. But successful market timers manage their fear, while losing market timers are controlled by it.
| "The fear of loss can keep a market timer from executing a trade" |
When faced with a particularly stressful decision, it is a perfectly normal human response to revert to the "fight or flight" response. Either we do battle, or flee. When a market timer feels such an emotional response, his or her decisions are very likely to be adversely affected.
Fear of Loss
The fear of loss can keep a market timer from executing a trade. Or it can keep him from exiting a trade when the trading plan calls for it. Either can be costly.
No one likes to have losses, but even the very best timers do. The key is to realize that you are worrying about the results of "that" trade, and not concentrating on executing the plan, which over time will make you successful.
Trading plans, such as the ones we use here at FibTimer, take time. No single trade makes or breaks the plan. Once you understand and accept that, it is much easier to make the trades without the "fight or flight" response hampering your ability to act.
Fear of Missing Out on Profits
This fear is usually felt during runaway rallies. All your friends are talking about the incredible profits they are making every day. If you really look at this in the right perspective, it is a very dangerous kind of fear.
It eventually causes you to buy in, and of course, when you and thousands of others who feel the same way react at the same time, the market is finally at its top.
Having a trading plan, and sticking to the trading plan, eliminates this fear. You "know" your plan works, so you are not susceptible to the "greed" factor that comes so easily in market rallies.
Fear of Losing Profits
This fear arises when you have a profit, and start worrying about losing it. If you take your profits, you will feel like a winner! But you know this story. The market will likely continue in the same direction, leaving you with an entirely new set of fears.
| "Fears cloud decisions. And decisions clouded by fear, that feel right at the time they are made, are more often than not... wrong." |
Fears cloud decisions. And decisions clouded by fear, that feel right at the time they are made, are more often than not... wrong.
Again, back to the trading plan. You know what to expect, because you have a plan that "will" succeed over time. It "will" bring in those profits. So a commitment to the "plan" relieves you of the fears of missing out on that quick profit, and the decision that invariably turns bad.
Fear of Being Wrong
Consider these next two sentences;
1. The desire to be "right" is in direct opposition to the ability to be successful.
2. The desire to be "right" is in direct opposition to the ability to make money.
A market timer's desire to be right, to be able to tell his friends how successful he or she is, can become so powerful, that a he or she winds up second guessing, the "plan." Taking winners too quickly, or holding onto losers in the hopes that they will come back, or at least break even.
Conclusion
To sum it all up, "successful" market timers actually make their profits off the "fears" of the majority of investors, traders, and even other market timers.
They do this by "sticking to a plan" and not allowing emotions (fears) to rule their decision making ability.
FibTimer provides the plan. Based "not" on emotions, but on a sound "trading strategy."
Fear can be conquered when you have a plan. As time passes, confidence builds, and the plan will become easier and easier to follow. Stick with the plan.