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Frank started market timing in 1982 when the Federal Reserve cut interest rates and sparked the 1980’s bull rally. Realizing that this rally could have been forecasted, he began to search for indicators which had similar forecasting ability. Within a year, his first newsletter was launched,... More
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  • The Impulsive Trader

    The Stereotype

    We are all familiar with the stereotype of the impulsive trader. Traders who are impulsively looking for trading thrills, while telling themselves they are doing it to make a profit.

    The rush of adrenalin that comes from making the "big" trade and then watching to see if it is followed by a "big" win.

    It is not so different from betting at the race track. It is far removed from what is required for successful market timing.

    Impulsive market timers take trades because of emotional responses to news events, market rallies, or market sell offs, because they "feel" they know what is going to happen next in the markets.

    They take trades not because the trade is required, but for the thrill of the trade itself. All risk controls are ignored, no logical trading strategy is followed, and no exit strategy is prepared ahead of time.

    Of course anyone can act impulsively at times. But in the investing world, impulsive trades are almost always losing trades. Impulsive trading has led to the outright ruin of many traders.

    Delaying Gratification

    An interesting test was once run to measure a person's impulsive tendencies:

    Participants were asked to decide between taking an immediate, small monetary reward (that is, $100 right now) or a larger reward given later, $500 in six months.

    Impulsive people tended to take the smaller, immediate reward. They have difficulty delaying gratification. They can't wait for the larger reward. They want what they can get as soon as possible.

    Even disciplined people can act impulsively when the conditions are right.

    There is little harm in impulsively going for a latte instead of your usual morning coffee, black with two equals.

    Yet while some impulsive decisions may have little effect on one's life, impulsive decisions made when trading the stock market can have major negative consequences.

    Compulsively Impulsive

    Market timing, and all successful trading for that matter, requires that investors clamp down on emotional impulsive behavior. Market timing is possibly "the" perfect example of unemotional, non-impulsive and non-compulsive planning. Timers look far ahead in time, planning for gains that may not be realized for months. If in cash during a bear market, actual profits may be postponed years.

    Instant gratification is the exact opposite of what market timers must expect. Those who think that long term buy-and-hold investors hold the edge in long term planning are not correct. It is market timers, following a plan that takes years to unfold but offering gains far in excess of a simple buy-and-hold, who have the real long term strategy.

    Conclusion

    Impulsive traders will have great difficulty being successful (profitable) market timers. Market timing is the non-impulsive execution of a planned strategy, that can only be successful over time.

    Market timing requires adherence to a trading strategy that requires trading not when you feel the urge, but only at specific points in time when your trading strategy tells you to do so. And, those times are often in direct conflict with the prevailing market sentiment.

    Impulsive personalities face many difficulties. But in investing, be sure to hold those impulses at bay if you want to successfully beat the markets.

    Jul 25 3:47 PM | Link | Comment!
  • Maintaining Discipline, Easier Said Than Done

    The winning market timer is the disciplined market timer.

    Sounds simple. And everyone should find this sentence easy to agree with.

    Basically, it just means following a specific trading strategy and not deviating from it. But people differ in terms of their ability to maintain self-control and discipline.

    How are you handling the current volatility? Are you agonizing over sell offs and feeling great when the market rises?

    There is nothing wrong with these emotions, unless you act on them. That is the reason why non-discretionary timing strategies work. If you follow them, no emotion is involved and you are relieved of having to make emotional decisions.

    You just follow the trading plan.

    Discipline vs. Emotions

    It is easy to maintain discipline with a market timing strategy when that strategy is having a profitable run. But all strategies have times when they are not profitable. This is a fact of trading the markets and accepted by profitable market timers as the price of doing business.

    However, when a strategy is going through an unprofitable period, maintaining discipline is something else again. A trader, seeing losses in his portfolio, tries to find a reason why exiting the strategy is a good idea. Anything to take away the pain.

    The problem is, exiting a proven strategy is almost always going to cause much "more" pain.

    Exiting is an emotional decision and the stock market runs on emotions. But that just puts you in with the crowd. Making buy and sell decisions according to how you feel.

    Following the emotional crowd may take away the "pain" for a short while, but it is NOT the way to profit.

    Felix And Oscar

    As you may have casually observed, some people are very disciplined while others are undisciplined.

    Neil Simon's characters Felix Ungar and Oscar Madison illustrate the stark contrast between the disciplined and undisciplined.

    Felix was a neat freak who wanted everything in its place, while Oscar was sloppy and more impulsive.

    But there were times when Oscar was extremely disciplined. He was a well-known sports writer and he must have shown an acceptable amount of self-control in order to put out his column every day.

    Although he was a fictional character, Oscar shows how it's possible to be undisciplined in terms of personality traits, yet able to show discipline when completing a specific task, such as executing a trading strategy.

    Discipline Equals Profits

    Keep in mind that you don't have to be disciplined all the time. You only need to be disciplined when you are executing a buy or sell signal. It sometimes helps to remember this fact. It eases some of the pressure to think that you only need to be "disciplined" when you execute a timing signal, rather than during all waking hours.

    Don't minimize the importance of self-control and discipline. The more disciplined you can trade, the more profits you will realize over time.

    The urge to ignore a buy or sell signal, or even exit a trade because it is not currently profitable, can be very strong and often only those traders committed to following an unemotional timing strategy will stay the course.

    But when the big profit-making trend begins, if you do not take the trade, you will be left by the wayside. Because it is impossible to know "ahead" of time when that major trend is going to start, you must take all the trades.

    Conclusion

    This year's rally in the early months came after a second half of 2011 that was extremely volatile, with violent ups and downs but no trend. Yet the trade that resulted in large early 2012 profits had to be followed or we would not have had those profits.

    This summer, after what appears to have been a normal correction, the stock market is again moving sideways with volatile moves up and down lasting only weeks.

    Which buy or sell signal will be the one that makes a good profit? This is the point. No one knows ahead of time so they "all" must be taken.

    If the majority of stock market investors and traders had the ability to stick with a good timing strategy, most would be rich. Because that is not the case, we know that many market timers as well as traders fall by the wayside.

    Don't be one of them.

    Jul 18 5:19 PM | Link | Comment!
  • Trading The Short (Bearish) Side. The Truth Behind The Hype

    There is a great deal of "hype" regarding aggressive market timing, with timing services often advertising overinflated gains attained by trading both bullish (long) positions and bearish (short) positions.

    The truth is that market timers "can" make excellent gains trading both sides of the market. But what no one tells you is that it takes more discipline and patience than most timers are willing or able to give.

    Read on for the "truth behind the hype."

    Natural Upward Bias

    There is a natural upward bias in the stock market. That bias results in long periods of gains, during which there are many short but sharp corrections to the upward trend. These corrections often do not last long and are "usually" impossible to profit from.

    Often such corrections see most of their losses within the first few days. In fact, the markets can go for months without a tradable decline. Declines must be long enough and deep enough for market timers, especially mutual fund market timers, to take advantage of them. Seldom do the financial markets oblige.

    The fact is; using bearish (bear fund) positions during upward trending markets would often results in losses in those trades.

    For this reason, Fibtimer typically moves to a cash position when the markets are near their highs. Cash protects against further declines, and does not lose money when the markets reverse back to the upside, as they so often do.

    If the upward trend is still intact, the markets will reverse back up just as sharply. Often the resulting buying pressure causes traders to quickly exit short positions causing fast reversal rallies.

    It is hard on the emotions when these quick trades occur. But aggressive timers who take both bullish and bearish trades are better safeguarded by being in cash if the markets correct from their highs.

    Only when the stock market is in a long term decline or a bear market does Fibtimer enter bear fund positions. In such conditions, bear fund positions can create substantial profits.

    Time Frame

    Aggressive timers with a realistic time frame (several years or more) will certainly see a correction that will be long enough and deep enough to create substantial gains by taking bearish positions.

    If you want to use bear funds, you must have a long term horizon, and be willing to wait for those big declines (bear markets). This is just the reality of trading.

    Bearish positions are riskier than bullish positions because the markets trend higher for longer periods of time than they decline.

    We only use them when we are in a bear market.

    Of course years 2000 through 2002 were bear market years and the Bull & Bear Timer greatly outperformed all the other strategies. The same thing occurred in 2008-2009 when we profited using bear funds.

    But when will the next bear market start?

    Going For the Home Run

    What market timers need to know is that there can be large profits made during long term declines (bear markets). But until we have a bear market, it is better to use cash positions during sell signals to protect against loss, yet not cause additional losses if the markets reverse to the upside.

    Bull and bear timers must be willing and able to stand this test of time.

    Market timers who trade both bullish and bearish positions should "expect" that they will need to trade for several years before using bear funds. It is not safe to use those funds near market highs. The risk of losses is far too great.

    Those who trade bearish positions are going for the "home run." But you must recognize that home runs are not hit every day. You may go a couple of years between them, or even longer.

    If you feel you cannot stay the course for such a time frame, use bullish only timing strategies like out S&P Conservative Timer, which goes to cash during sell signals.

    Conclusion

    Don't be swept off your feet by hype and advertising. Bull and bear strategies work, but timers who trade them must be prepared to stay with them for long periods of time.

    At FibTimer, even though we have been market timing since 1982 (online since 1996), our preference is to take bullish positions. We trade our own accounts using the Diversified Timing Portfolio which allocates only a limited amount (20% maximum) to bearish positions.

    Remember that Bearish positions should only be used in very specific conditions.

    Yes, bearish positions do result in large gains during bear markets such as we experienced in 2000-2002 and 2008-2009, but such declines are not everyday occurrences

    Jul 12 10:13 AM | Link | Comment!
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