Market Timing: You Can’t Trade that Way!

Put the watch down, you can’t time the market.

Some people mistakenly feel trend following is Market Timing prediction. It is not. Trend following reacts to market movements while Market Timing supposes you can predict or spot in advance a turning point and get a jump on the market. This is impossible to do with any regularity. Trying to time a market direction? You might as well flip a coin. We are dead serious.

Some definitions of Market Timing with our commentary following each:

Market Timing is a technique used by investors or money managers who believe they can predict when the market will change course. For example, a mutual fund manager might switch the bulk of his fund’s holdings from stocks into bonds or cash when he thinks — based on analysis, his own “gut feeling,” or both — that stocks have peaked. If he times the market correctly, he could make a huge profit. Then, when he thinks the stock market is ready to take off again, he could shift back into stocks in an effort to make another big killing.

If anyone has a rule that allows you to regularly know a market has peaked, please let us know. Additionally, how you know a market is ready to take off again before it actually does? These are false ideals. False goals.

Market Timing attempts to predict future market directions, usually by examining recent price and volume data or economic data, and investing based on those predictions. Also called timing the market.

Market Timing sure sounds like a sure-fire way to get rich. But isn’t this language straight from a late night infomercial?

A huge number of investors think they are buy-and-holders, but in fact they use a peculiar form of market timing that we have described before, the ICSIA or “I can’t stand it anymore” timing system. Though this is probably the most widely used timing system in the world, we don’t recommend it. It relies on emotional reactions to market fluctuations. After a long period of market gains, this system induces many of its followers to finally jump into the market, usually against their better judgment, when they can no longer stand to sit on the sidelines watching other people making what looks like “easy money.” When the market’s in decline, this irrational system prompts its followers to remain invested, even as they continue to lose money, until they cannot stand the losses any more – and then to bail out when prices are very depressed

Unlike the false hope of Market Timing prediction:

  1. Trend followers ONLY react to market movements as they happen.
  2. Trend following does NOT involve gut feels.
  3. Trend following does NOT attempt to predict turning points.
  4. Trend followers NEVER know in advance when a market will trend.

A final sarcastic (and very true) definition of Market Timing:

Market Timing attempts to leave the market entirely during downturns and reinvesting when it heads back up. Requires a crystal ball to be effective.

Feedback from Readers

Excerpts from Boyd Holcomb, a reader that understands part of the game:

But the real “market timing” is by those thousands of us who use technical indicators, combine them and “massage” them to FOLLOW the market gyrations — never to forecast it. We and you all know that no one, anywhere, can forecast any market, any time. But our “indicators” can show us internal changes that are taking place. That’s the best that anything can do…I use ProFunds and Rydex for trading either long or short, sometimes one trade a week, sometimes not. And it is profitable, with losses being less than half of profits. I’m age 88, using retirement money, with lots of caution because losses cannot be covered with outside income from jobs or business. This is Sun City, AZ, and we have an Investment Group of almost 100 people, and some dozens of them are doing pretty much the same as I am. No one is trying to PREDICT anything. And many of them use only INDEXES, preferably NDX100, as I also do.

We do not know if this reader is using money management. If he is using indicators alone he is in potential trouble.

Trend Following Products

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