Handling Stock Market Hardballs

As a market timer, the one thing we must always remember, is that the markets can, and most definitely will, throw every possible curve ball, fast ball, knuckle ball, slider, braking ball, etc. at us.

Obviously, the reason we invest in the stock market is because we recognize the huge potential for profits in the financial markets.

The Markets Can.... and Will

However, the reason we are market timers is because we have come to realize that not only is there "no easy money" but also that the stock market will do all it can to "relieve us" of our money.

We are more than uncomfortable with the "buy and hold" approach to investing, and realize that although "buy and hold" may be fine if you are willing to wait 20-30 years, it can lead to huge losses over shorter time frames (example 2000-2002).

The stock market is the ultimate of Big Leagues, and there are traders who understand the psychological warfare you are facing, and know how to use it to take your money. But understanding the Big league rules, puts the winning odds back on our side.

Market Timing is Unique

Market timers face psychological battles that very few people ever face in their entire lives. There are so many differences between the emotional hard balls that are thrown at us in market timing and what we experience in our lives, that it can easily interfere with our ability to deal with them.

But if we can identify those hard balls, we can take steps to protect ourselves from them, stop them from influencing us, and become winning (profitable) market timers.

For example, in the workplace, working hard and expecting to be justly rewarded for it are part of the American dream. Who would argue with the logic?

But in the stock market, work as hard as you can and the markets will still reverse on you and give you losses.

This is because timing the markets is not about our work ethic. It is not about genius or luck. It is about numbers.

Numbers and Probability

Toss a coin 50 times and you can expect 25 times it will land heads up, and 25 times it will land tails up. But there is no rule that says the first 7 tosses will not all come up tails!

We will go over the "numbers" part later, but for now it is important to understand that we can, and usually will, see runs of losing tosses (trades) as market timers. But if we realize that over time the numbers will add up in our favor, we can endure those losses.

Being prepared for all that the market can throw at us, helps us to stick with our trading strategy.

Once you face the fact that market timing isn't easy money, or that you won't become rich overnight, you will be able to prepare yourselves mentally for the long haul.

If you expect losing trades, you won't be disappointed when they happen. You will have your eyes set on the big picture, which puts the odds in our favor "over time."

Numbers Game - the Explanation

It is really very simple. There are two important aspects of any successful trading plan, and both need to be considered.

1. Probability - We know that over time, that if we flip that coin enough times, it will land 50% heads up, and 50% tails up. We can count on this. A string of tosses that have the same outcome mean little, as long as we keep tossing the coin!

2. Risk vs. Reward - Potential rewards (profits) must be greater than risk (losses).

Knowing that the laws of probability are on our side over time, if we can establish that risk vs. reward is in our favor, we can use these odds to create a trading strategy.

By looking at the history of the stock market over many years, we can see that "most" of the time it is either trending up, or it is trending down. The "fact" that trending markets are the norm, is our market timing "trading edge."

If each toss of the coin has even odds, but some tosses remain "profitable" for long periods of time, while those tosses that are unprofitable are of short duration and limited un profitability (losses kept small), we know that we will win over time (as long as we make all the tosses).

At FibTimer we trade all trends. No one knows ahead of time which trend is the one that will continue for many months and make the big profits. All we know for certain is that the markets will spend more time "trending" than they will spend in "trend less" sideways trading.

The "RISK" is that trading all trends produces some losses if the trend does not follow through. By trading "all" trends, we keep losses small because we do not stay with a losing trend. If the trend changes, we reverse position (or go to cash according to the strategy used).

The "REWARD" is that we will never miss a trend, and since the markets are in trends more than they are not, and we make our profits when the markets trend, we are profitable more often than not.

It is the in between times (trend less markets) that require market timers to understand this logic. Stay the course, make "all" the coin tosses, and over time, you win.

Conclusion

Scary ideas are no longer frightening after you've acknowledged them and know not only to expect them, but that they are will not harm you if you hold true to your course.

The more you can identify the scary aspects of market timing, and prepare for every possibility, the more likely you'll be able to persist in the face of adversity.

Market timing is challenging. Many who start fall by the wayside after they realize that it is not going to make them rich in days or weeks (amazing, but some really do expect that), or after one or two losses.

Remember, there are many timers out there who have met the challenge and have the winning track record to show for it.

Look at our historical trading numbers. No emotion is involved so they look great over the years. But in the short term, there were many strings of losses, and many timers gave up along the way.

Stick with the plan and you will not be one of them. Stick with the plan and you will be successful.