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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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  • Immediate Profits 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.

    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 is below.

    The Need For Immediate Winning Trades

    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 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 occurs later.

    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.

    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 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 profitable.

    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 success.

    Conclusion

    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 trend.

    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.

    Mar 13 2:59 PM | Link | Comment!
  • Market Timing Discipline, Not As Easy As You Thought

    Market timing discipline means controlling impulses and controlling emotions. When emotions rule our trading, loses are usually the result.

    This is why successful market timers follow a thoroughly tested timing strategy. One that has been used in all kinds of markets, including bull, bear and sideways markets.

    As many novice market timers can tell you, however, maintaining discipline is often easier said than done.

    Usually the first problem arises when the markets are between market trends. Possibly you had a nice profit during a rally, but now the market is trading sideways and has generated a small loss on a false signal. There is no trend, or one is certainly not obvious.

    You were strong the first couple of signals, making all the trades, but after this loss you are starting to second guess the timing strategy.

    Self-Doubt Arises

    Just as the vast majority of market participants are driven by fear and greed, many new market timers find it difficult to avoid succumbing to self-doubt and panic.

    Market timing is challenging in that we often take positions "against" the prevailing sentiment of most traders. It also has times when false signals are generated. But a good strategy does not stick with the false signal. it changes and protects capital from large losses.

    Losses are part of trading with "all" successful strategies. Small losses are acceptable. Large ones are not.

    I was asked to look at another timing service that has never had a loss since 2001. Some of the yearly gains were over 400%. I looked and I do not believe it. Creating the perfect strategy by backtesting is not difficult, but in real-time the strategy can be a disaster. Remember that some services are like used car salesmen. The 10 year old car being sold for double its value sounds great while the salesman is touting its pluses. But watch out when you try to drive it on a road.

    And remember this, sideways markets are almost always either a base, or a top, and are followed by the next profitable trend. If you do not take all the trades, how will be sure to take the one that generates all the profits?

    Invariably, the trade you skip, is the big profit maker. The one that starts the next huge trend. And there is "always" a next trend. In fact, 200 years of trading history shows the markets are in a trend 80% of the time. That 20% in between can be rough, but soon the next trend will begin.

    The stock market had such a period in the second half of 2011. No trend but violent ups and downs that failed over and over. Had the year end trade that began the current market advance been ignored, there would be no profits such as we have in 2012 and 2013.

    Discipline is key. It is vital to take whatever steps are necessary to maintain discipline and take every trade.

    Markets Are Unpredictable In Short Time Frames

    The markets are chaotic and unpredictable in short time frames. The current volatility being a perfect example. When faced with an uncertain set of circumstances, it is easy to see why market timers may, at times, feel unsure and unsettled.

    Timers follow strategies that provide entry and exit signals based on timing strategies designed to be profitable over time. Strategies that are also designed to protect their capital during the inevitable sideways markets.

    But no timer can know with certainty how any "one" buy or sell decision will play out. Some market timers thrive on the excitement, but many find it disconcerting.

    The best way to combat feelings of uncertainty is by following a trading plan. If one trades with a detailed trading plan, such as the strategies offered at FibTimer.com, he or she will impose structure onto an unstructured reality.

    The more structure you have to follow, the less uncertain and unorganized you'll feel. You will know what to do and when to do it.

    The markets may seem at times like a mass of confusion, but you can address it by following a strategy that actually uses the volatility of the markets to generate timing signals.

    Optimistic Yet Realistic

    One's mood and attitude is another factor that impacts the ability to maintain discipline. An optimistic yet realistic attitude is vital to maintain market timing success.

    Market timing often places you at odds with the current market sentiment. It is understandably hard to feel optimistic when your position is at odds with the majority.

    Many market timers struggle with trying to maintain a positive or at least neutral mood.

    It takes practice.

    Emotions And Decision Making

    Maintaining discipline is vital for market timing success. It can be extremely difficult at times, especially in sideways (non-trending) markets like in the last half of 2011.

    The best way to be disciplined is to stick to your timing strategy and keep your emotions and impulses under control.

    Take a look at the trading history of the strategy you are following. Every timing strategy at Fibtimer has a "Trading History" link. You will see times when it generated losses. On paper they seem insignificant. But when they occurred, subscribers had difficulty making the trades.

    Note that the trading histories posted are real-time. They are not backtested. Fibtimer has been in business through two bear markets (since the mid-90s) and has no backtested results posted.

    Now look at the results of the trading strategy after a year. Two years. Three years. Those small losses did not stop the strategies from being very profitable. This important fact will help you to stay the course and make all of the trades.

    Only by maintaining discipline can you realize long term success timing the markets.

    Mar 06 8:12 PM | Link | Comment!
  • The Basics On Fibonacci Ratios & Elliott Wave Theory

    This report takes a look at the basics of using Fibonacci ratios and Elliott Wave theory.

    Fibonacci ratios and Elliott Waves help us look ahead and be prepared for what the financial markets will do over the coming weeks and months.

    What are Fibonacci Ratios?

    Leonardo Fibonacci was a 13th century accountant who worked for the royal families of Italy. In 1242 he published a paper entitled "liber abaci." The basis of the work came from a two-year study of the pyramids at Gizeh.

    Fibonacci found that the dimensions of the pyramid were almost exactly the same as the golden mean or (.618).

    Fibonacci is most famous for his Fibonacci Summation Series which enabled the Old World in the 13th century to switch from Roman numbering (XXIV=24), to the arithmetic numbering (24), that we use today. For his work in mathematics, Fibonacci was awarded the equivalent of today's Nobel Prize.

    Fibonacci Summation Series

    The Fibonacci Summation Series takes 0 and adds 1. Succeeding numbers in the series adds the previous two numbers and thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. At the eighth series, by dividing 55 by 89, you have the golden mean: .618. If you divide 89 by 55 you have 1.618.

    Do you see the pattern? 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13.....

    These ratios, and several others derived from them, appear in nature everywhere, and in the financial markets they often indicate levels at which strong resistance and support will be found. They are easily seen in nature (seashell spirals, flower petals, structure of tree branches, etc.), art, geometry, architecture and music.

    Why are they important to the financial markets? Because the markets tend to reverse right at levels that coincide with the Fibonacci ratios. Whether you see this as cosmic or coincidence makes little difference. It happens and tens of thousands of traders make decisions based on Fibonacci ratios, thus amplifying the results.

    For example, if the Nasdaq rallies 100 points and then corrects, it will often correct 61.8%. Right at, or close to the 61.8% retracement (you have heard us use this term many, many times) the Nasdaq is likely to reverse and start advancing again. Of course it is not this simple. Fibonacci support and resistance levels can fail. There are other Fibonacci levels which may turn the markets (78.6%, 127.2%, 161.8%, etc.). But the fact that it does happen is what is called a trader's "edge."

    A trader has an edge when he knows the probabilities of a particular action are greater than normal. Trading strategies are built around this information, or multiple similar probabilities.

    Elliot Wave Patterns

    Elliot Wave Patterns, in short, are usually a three or five wave series of advances, or declines, that define a trend. They are the result of crowd psychology, and thus are usually more reliable when found in broader based indices, such as the S&P 500 Index, Nasdaq Composite Index, etc.

    Typically, if the S&P 500 Index moves higher in a 5 wave pattern, and then falls below the top of wave 3, it signals the start of a retracement that normally consists of 3 waves.

    In a bear market it works the other way. A five wave pattern defining a declining trend, which is then reversed by a 3 wave rally, which eventually reverses and another five wave pattern begins to the downside.

    Finding a wave pattern that completes at a strong Fibonacci support or resistance level can be a very reliable indicator of a change in trend.

    By having an Elliott Wave pattern complete right "at" a Fibonacci support or resistance level, you in essence have increased the probabilities of being correct.

    Trading Patterns

    Because the markets often move in 5 wave and 3 wave patterns, and the turning points that create these patterns are often at Fibonacci support and resistance levels (61.8, 161.8, etc), you can expect that eventually, a way would be found to use them to forecast the future direction of the financial markets.

    There are several trading patterns used by advanced traders, including day traders, which take advantage of the combined strength of Elliott Waves and Fibonacci retracements.

    These patterns commonly repeat in stock and index charts and traders who use them are called "pattern traders."

    Although pattern recognition is a potent tool in trading, we suggest that no one try using them without thorough training in pattern trading. There is more to it than just knowing the patterns, including risk management and money management, without which the patterns are more likely to cause headaches than profits.

    An excellent book on such patterns is, "Profitable Patterns for Stock Trading" by Larry Pesavento. Larry is an authority on trading patterns, and I studied with him at his home in Arizona some years ago.

    How We Use Them

    At Fibtimer, we use Elliott Wave Theory and Fibonacci support and resistance levels to map out where we think the financial markets are headed.

    Recognizing that these tools are NOT always right, we use them to prepare for what is to come, but not for actual trading decisions. It is always good to have a feel for what the markets will do so that we are ready emotionally for the trading decisions ahead.

    Although both Fibonacci support and resistance levels and Elliott Wave theory are good tools, they fail too many times to be used for market timing. Many would disagree with this statement, but our research shows that over the years they will give accurate forecasts only about 50% of the time.

    They are great when looking at previous chart data, but because there are so many variables, they are not as accurate looking forward. Good... Useful... But not good enough for us.

    All trading signals at Fibtimer are generated by non-emotional and non-discretionary trend indicators. Our trend indicators catch "every" trend and when a trend fails, they quickly tell us to reverse so any losses are very small. Much better for "profitable" market timing as our market timing trade history pages show.

    There is no way to separate emotions from market analysis. If a strategy offers variables that need to be interpreted, emotions will sway those interpretations. It is human nature and cannot be avoided.

    This is why Fibtimer follows non-discretionary trend following indicators... so that emotions cannot sway any buy or sell decision.

    Feb 27 1:02 PM | Link | Comment!
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