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Market Timing in Trendless Markets
We have received so many emails from subscribers who are concerned about the small back and forth trades over the past several months,
that we felt this week's Market Timer Report should focus on just that subject.
We encourage you to look at charts of the S&P and Nasdaq covering the last four to five months. The market is in a trading range and has
actually gone nowhere, except up and down within that range.
Sideways markets are "always" tough on market timers, and the current markets are no exception.
We put together this report to answer your questions. We hope that by reading it, you will have a clear understanding of what
our strategies are designed to accomplish, and what you as a subscriber can expect.
What exactly is a Trend?
Trends can be found in all time frames. On a 1 minute chart, a trend might last an hour or more. On a 5 minute chart, a good trend
might last several hours. On a daily chart, a trend will be several months or longer in duration and on a weekly or monthly chart, a trend is likely to be
measured in a year or even year(s).
To time mutual funds, nothing less than a daily chart can be used, and for a trend to be long enough to be successfully timed, it needs to last
at least two months, and trends lasting four to six months (or longer) are the real profit makers.
Take a look at that chart again. We have not had a trend lasting that long since early December, 2003. In the Nasdaq, it has not been since October, 2003.
As the markets are more often than not in a trend, this is a very long time to be going sideways. We are either in the base of a new upward trend,
or at the top of a new declining trend. No one knows which direction it will take when it finally begins.
Anyone can identify a trend when looking at historical charts. But market timing involves identifying "future" trends, and doing
so early enough so that they can be traded profitably.
FibTimer identifies trends. To identify a "potential" trend, a good timing strategy must wait until at least some proof of a trend has
been established. That usually means at least 3-5% of a trend has already occurred before we can issue a signal and trade it. To just jump on board
after a one day rally would be irresponsible. The "potential" trend "must" have already started and have some staying power.
Trendless Markets
In a "trendless" market, we may get the signal after that 3-5% start, but a true, lasting trend, never materializes. Instead, several days or weeks after we enter the
new "trend," the market reverses. A true trend does not develop. This results in back and forth trades that end in small losses, as well as small gains. It can also result in several
small losses in a row, or several small gains in a row.
Avoiding Back & Forth Trades
Can we avoid the small back and forth trades? Certainly. We can trade on weekly or monthly charts. There will seldom be back and forth trades.
But we would also miss the first 10-15% of a real trend when it starts. We chose not to do this.
Would we have less of these small losing trades. YES. Absolutely. But we would
still gain or lose in the ups and downs of a trendless market, by staying unchanged in our position over that longer (weekly or monthly) time frame.
The same gains and losses are still experienced, and some losses may be much larger than our current timing strategies allow.
The Price of Doing Business
What we are saying is. Losses are inevitable! They are the price of doing business as a market timer.
Our timing strategies "accept" these small losses (and sometimes small gains). No one knows when the next trend will start, or in which direction the
next trend will go.
No one.
Tradeable trends only occur once, or maybe twice a year. Sideways markets occur between trends, and this is where we are now. If a market timer
cannot accept small losses, they will not realize the gains when a trend finally does start.
Multiple back and forth trades in a trendless market is a price we "willingly" pay in order to "insure" that we never miss a real trend when it occurs.
So we will continue to trade every "potential" trend until the next real trend begins. Then we will be on board, and we will reap the rewards of market timing.
Understand... our strategies are "designed" to allow small losses. They are designed "never" to miss a trend. They are designed
"never" to lose large amounts of capital in a bear market, and in fact to make money in a declining trend if using one of our bull & bear timing strategies
is being followed.
But in order to do this, ALL potential trends MUST be traded.
Conclusion
We hope this explanation helps. Keep your focus on the "big picture." Do "not" agonize over every little back and forth
that occurs in a trendless market, or every "guru" who says he knows for certain where the market is headed next. Do not lose sleep over
news events that you have no control over, or daily rallies and declines that you also have no control over.
The Gurus don't know what tomorrow holds. You don't know what tomorrow holds. We don't know what tomorrow holds.
That is why we trade trends. That is why, over "time," we always beat the market.
The key word is "time." The next trend will occur. It always does. "When" is not worth worrying about, as we will be profiting from it when it inevitably happens.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable. |
