vs. Delayed Rewards
Trading, just because we are itching to do something, can be dangerous
to our financial health. Very dangerous.
Our eyes should be focused on the future, and that is what market timing
is all about. Following a strategy that beats the market "over time," and
protects capital during bad times.
The Need For Immediate Winning Trades
In this commentary we look at the psychology of trading. The need for immediate
rewards and the inability of so many to recognize the value of delayed rewards
and follow a plan to achieve them.
Why do so many investors and traders fail to achieve profits? One of the reasons
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 ($300) 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 $300. 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 $300. 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 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
While the desire to succeed in market timing is perfectly fine, the desire for
immediate profits and winning trades is not. It clouds the real goal. Making
large profits over time. A goal few investors ever achieve.
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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 long time frame.
| "...The more trades
you make with a winning trading strategy, the more the law
of averages will work in your favor, and across the series
of trades, you'll be profitable. "
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.
The more trades you make with a winning trading strategy, the more the law of
averages will work in your favor, and across the series of trades, you'll be
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
If you anticipate that you won't win on a single buy or sell signal, you will
not feel disappointed when it happens.
If you acknowledge that you may not profit even after a series of buy or sell
signals, you will similarly be able to deal with it, bounce back, and be ready
to take the next trade.
But on the other hand, if you aren't prepared for these possibilities, 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
But typically, we start our market timing during difficult market conditions.
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.
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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.