Handling Stock Market
As a market timer, the one thing we must always remember is that the
markets can, and most definitely will, throw every possible hardball,
curve ball, fast ball, knuckle ball, etc. at us.
The reason we invest in the stock market is because we recognize the huge potential
for profits. But we are timing in a freely traded market that is subject to the
emotional whims of traders. And when money is involved, those emotions can, at
times, be extreme.
We became market timers because we have realized that not only is there no easy
money but also that the stock market will do all it can to relieve us of our
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. The most current
example being 2008 when the S&P 500 and the Nasdaq Composite gave up 50%.
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
Understanding those Big League rules, will put the winning odds back
on your side. The timing strategies at Fibtimer are designed to identify
and follow trends. They allow profits to ride and cut losses short. This
is what the professionals do, but most individuals have great difficulty
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 emotions experienced
in trading the financial markets, and what we experience in our lives, that
it can easily interfere with our ability to trade.
If we can identify those emotions we can take steps to protect ourselves from
them, stop them from influencing us, and become winning (profitable) market
timers and traders.
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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
But in the stock market, work as hard as you can and the markets will still reverse
on you and give you losses. Make the perfect trade and it can still go bad.
This is because timing the markets is not about our work ethic. It is not about
genius or luck. It is about numbers and probability.
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.
Once we realize that over time the numbers "always" add up in our favor, we can
more easily endure the short term swings. The market "hardballs."
Being prepared for all that the market can throw at us, helps
us to stick with our trading strategy.
|"...if we can establish
that risk vs. reward is in our favor, we can use these odds
to create a 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
If you expect that at times there will be 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 your favor over time.
The Trading Edge
There are two important aspects of any successful market timing strategy or 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
2. Risk vs. Reward - Potential rewards (profits) must be greater than
By looking at the history of the stock market over many years, we see that most
of the time it is either trending up, or it is trending down. In fact, about
80% of the time it is in long term trends. The "fact" that trending markets are
the norm, is our market timing "trading edge."
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
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 trendless sideways trading.
The RISK is that trading all trends produces some losses if one of the trends
does not follow through.
|"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. "
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 larger profits when the markets
trend than the small losses from trend failures, we are profitable more often
It is the in-between times (trendless markets) that require market timers to
understand this logic. Stay the course, make all the coin tosses, and over
time, you win.
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 (or any trading),
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 small 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 Fibtimer's historical trading numbers. No emotion is involved so they
look great over the years. But in the short term, there were some small losses.
There are some years when profits match or are less than those of the indexes
we track. But when there is a bear market, timing shines brightest. Not losing
50-80% of your savings in a single year is worth years of underperforming sideways
Focus on the war, not the small battles along the way. Stick with the trading
plan and you will be successful.
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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.