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Critical Issues For Market Timers
It is not enough to have a successful market timing strategy if that strategy is not traded with discipline. It is also not enough to trade with discipline if you are overly aggressive with those funds allocated to market timing, and cannot handle the resulting volatility.
Many market timers think that the more they trade, the better they will do. But in reality, market timers do not need to trade aggressively to do well. Four critical issues; strategy, discipline, money management and diversification are discussed below.
A case in point is our Bull Pro Timer compared to our Bull & Bear Pro Timer. Currently the Bull Pro Timer, which takes only bullish trades and goes to cash during sell signals, is outperforming the more aggressive Bull & Bear Pro Timer, which takes the more speculative bearish positions during sell signals.
When the market has a prolonged down trend, or a bear market that can last months to even years, the more aggressive strategy will achieve gains that far exceed the Bull Pro Timer. But when the bear is not growling, a less aggressive approach usually works much better. If fact, our very Conservative S&P Timer, which only averages about one trade "per year," is doing incredibly well. It has gains in excess of + 18% for this buy signal.
This brings up the subject of diversifying. We go into that below so be sure you read it.
So, much depends on the current market conditions and on a market timer's expectations. Are you looking for gains over a long time frame, during which bear markets are sure to occur, or must you see immediate or constant gains in order to stay with a timing strategy?
Market Timers Must Have An Edge
At FibTimer, our "edge" is trend trading. We know that the financial markets are usually in a trend, either up or down. In fact, history shows us that they are in trends 80-90% of the time.
This "knowledge" is our "edge." We know that there are times that the markets are not trending, but that these times do not last long. We keep our losses small during non-trending markets using disciplined risk management. And, by trading every trend that occurs, we know absolutely that we will never miss a trend.
| "Limit your losses and the profits will take care of themselves" |
With the markets trending 80-90% of the time, we are "profitable" 80-90% of the time. By limiting losses, and allowing profits to ride, we use our "edge" to time the markets with great success. There is an old saying that applies here; "Limit your losses and the profits will take care of themselves."
Disciplined Execution
Once you have an edge, you have to be able to execute. The common trading errors of not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you "think" a signal will be issued soon, can be a disaster to your profitability.
By not sticking to a plan, you allow emotions to rule your finances, and that places you right in with the majority of investors. Those who are the cause of the market's volatility. The "herd" followers.
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.
If you are concerned that following a disciplined non-discretionary timing strategy can result in small losses at times, just try trading the markets using your instincts. The deadly results of emotional trading are usually evident quickly.
A second reason for following a non-discretionary timing strategy is that is gets you "out" of losing buy and sell signals fast while limiting drawdowns. You are not subject to the psychology of trading. To holding onto a trade in hopes it will come back to profitability. Then exiting, finally, in a panic after huge losses.
The disciplined execution of a timing strategy avoids all of these pitfalls. You just follow the buy and sell signals with the absolute assurance that your losses will be limited and you will never miss a trend. Over any fair time frame, you will beat the markets.
Effective Money Management
Overly aggressive investment allocations can ruin even a good timing strategy with excessive drawdowns, while overly conservative allocations of capital will not optimize your total returns.
If you are a conservative investor who wishes to use market timing to protect against losses in a bear market, do NOT invest 100% of your funds in an aggressive bull and bear strategy that you are not prepared for. Yes, they make a great deal of money over time, but aggressive strategies do have more frequent buy and sell signals, and more frequent small losses.
| "Diversification is not just a word., it is a prerequisite to having a successful timing strategy." |
If as a conservative investor you are unable to handle those losses, you are likely to exit the trade, thus locking the losses in, at just the wrong time!
Stick to strategies that fit your emotions. Market timers should know themselves and use timing strategies that they will be able to stick with over long time frames. Patience is the market timing key to success!
Diversification
Even aggressive market timers should not time 100% of their funds in a single aggressive strategy. Diversification is not just a word., it is a prerequisite to having a successful timing strategy.
At Fibtimer, we rarely invest more than 20-30% of our own funds in bull and bear strategies. The rest is diversified in sector funds (Sector Timer), a small percentage in the Gold Timer and a small percentage in the Bond Timer.
Using at least some diversification takes the stress out of investing, and makes it much easier to follow buy and sell signals with discipline.
Conclusion
At FibTimer, we never question buy and sell signals and follow them faithfully. Over the years, our disciplined approach has resulted in superb gains. We hope that we can instill this disciplined trading into all of our subscribers.
It does not take blind faith. What it takes is a realization that our own emotions and instincts are usually wrong, and that a non-discretionary timing strategy that trades all trends and limits losses in non-trending periods, is the most successful approach to profiting in the stock market.
Once you realize this, you will relax and allow the strategies to successfully grow your investments as they are designed to do.
Recent articles from the FibTimer market timing services;
The Trend Is Your Friend
Market Timing, Do You Have What It Takes?
Is "Volatility" A Four Letter Word?
Successful Market Timing DEPENDS On Change
Money And Emotions
Fear & Market Timing Paralysis
It's All In How You Play The Game
The Grass Is "Not" Greener On The Other Side
Two Emotions That Can Influence Your Trading
Beliefs of Successful Market Timers
New Year's Resolutions!
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Disclaimer: The financial markets are risky. Investing is
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The foregoing has been prepared solely for informational
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and data believed reliable, but there is no guarantee that
future results will be profitable. |
