Letting Your Profits
Stick With The Plan
This may seem like a common sense statement, but the reality of market timing
is that the majority of timers "think" they can stick to a timing strategy, however
when the market moves against them, as it always does as some point, they are
swayed by financial news stories, the desire to be "with" the crowd, and their
own emotions, often exiting the strategy at exactly the wrong time.
Think about it. Let's use a fictional market timer named Mark for this example.
Mark has a strategy he knows has, over many years, outperformed the stock market.
Mark knows going in there will be times when the strategy will lose. He sees
this in the historical trades. He accepts this or at least he thinks he does.
But then, the market turns against Mark's first buy or sell signal and he is
down 2%, then 4%. Mark is counting the dollars. He wakes up during the night
with feelings of dread. Maybe "this" time it is different.
The next day, Mark exits the strategy and immediately feels better. He starts
searching the internet for a better timing service.
They are easy to find. We have personally seen some that "guarantee" 200%
and 300% returns. Much better than that 4% loss.
Another says it made 110% in 2015, but does not say the strategy did
not go live until the end of 2015.
So it is not real...fake results...backtesting.
Of course the day after Mark exits the strategy, the market reverses and within
a few more days, the strategy is now back in positive territory. Mark cannot
enter, because he has lost 4% and knows it is not wise to enter mid-trade.
Mark is now feeling upset again. The initial feelings of relief when he exited
the trade are gone. Mark is starting to feel he is missing out all over again.
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After watching the market continue to advance, Mark
finally makes a decision and re-enters the position after
it has a nice 10% gain. Mark is feeling good again as the
market has obviously turned and he is back on board.
Immediately the market takes back 4-5% of those gains and Mark now has a loss,
that never should have occurred, of 8% to 9%.
| "When you start following
a strategy, plan to stick with it for several years. That is
how the smart money makes profits"
Those who stayed with the strategy from the initial buy or sell signal are in
positive territory and have a nice gain. Mark, however, exits again, with double
his original loss, and quits market timing for good.
None of this need happen. When you start following a strategy, plan to stick
with it for several years. That is how the smart money makes profits. They do
not let emotions rule their trading decisions. They stick with the plan!
The Trend Is Your Friend - Trade With The Trend
At FibTimer, all of our timing strategies are based on trend trading. We know
that the financial markets are usually in a trend, either up or down. So we enter
the markets "after" we have identified a trend.
It is great to catch a reversal. It is also very difficult. Let me rephrase that....
it is almost impossible. We read stories of those who have perfectly caught a
reversal, but they are news stories "because" it is so uncommon.
It is much easier to wait for a trend to begin, and then jump on board. If the
trend fails, and some do, a well managed timing strategy will exit to cash, or
reverse position, with only a small loss (or even a small gain). When the trend
keeps going, that same well managed timing strategy rides the trend as far as
the trend goes. This is where the power of trend trading is seen. By never missing
a trend, and staying with the trend, trend following market timers make huge
profits over time.
Finally, one of the most dangerous trading methods is to take a contrary position
and pray for a reversal. Such trades rarely work out. But many, many traders
try them. And... many, many traders lose a lot of money.
Let Your Profits Run - Cut Your Losses Short
The second part of this rule (cut your losses short) is the toughest one.
It involves admitting that you were wrong. But in market timing, as in "all" trading,
it is a rare moment indeed where you will eventually be proven right after first
being proven wrong.
| "...allowing emotions to have
any say in your market timing (or any trading) decisions, guarantees
that you you will have even more emotions to deal with. The emotions
caused by losses."
The FibTimer strategies are designed with strict risk management right from the
start. We "never" let losses grow. If we issue a buy or sell signal, and our
indicators reverse, we reverse position (or go to cash) immediately. If you look
at our various strategy trade histories you will see that we rarely take a loss
of more than a few percent.
There is a reason for this. It is easy to make back a small loss. However large
losses are not only hard to make up, but the psychological pain you experience
from them could cause you to quite the strategy. And quitting with a loss not
only guarantees that you will lock in the loss, but it is likely to have a detrimental
effect on your buy and sell decisions for a long time.
The opposite of course is "letting your profits run." At FibTimer we never set
a profit target. As far as we are concerned, when we have a profitable trend
going, the sky is the limit. We will stay with that trend as long as it is profitable.
20%, 50% 100%. We "never" limit profits.
This is why small losses do not concern us. We know that when we have our next
profitable trend, we will ride it to the end.
Never Make Timing Decisions Based On Tips
A tip is rarely more than opinion, and frequently a bad one at that.
Even if the tip comes from a friend, don't take it. If you have a hard time with
this, go back to "The Trend Is Your Friend."
Burn this into your head! Unfortunately, in market timing, a "friend" is not
always a friend.
This is another (of many) reasons why we follow non-discretionary timing strategies
at FibTimer. There is "always" a reason to doubt a trade. There is always someone
who knows, absolutely, that the trade is wrong. In fact, they are often willing
to go into great detail why you are making a bad trade.
Why would they do this? Simple, it is to prove to themselves that their trade
is the more correct one.
Again, this is all emotion. And allowing emotions to have any say in your market
timing (or any trading) decisions, guarantees that you you will have even more
emotions to deal with. The emotions caused by losses.
Stick to the timing plan. Trade with the trend (all FibTimer strategies are trend
following strategies), cut your losses short and let your profits ride, and never,
but never, listen to others. Successfully following and profiting from a timing
strategy can be accomplished only by you, and you alone.
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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.