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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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  • Fear & Market Timing Paralysis

    The fact is, all traders, investors, and yes market timers, feel fear at times, at some level.

    What is important is how we address it. Knowing the definition and reasons for fear can actually help market timers to overcome it.

    Traders "Believe" They Know The Future

    In the book "Trading in the Zone" by Mark Douglas, he describes how most traders "...believe that they know what is going to happen next."

    This can cause market timers to put too much importance on the "current" trade, and to lose focus on their performance over time.

    But market timing is based on "probabilities" that make us successful over time. Too much focus on a single trade causes the fear levels to rise. As this occurs, market timers become hesitant and cautious, trying to avoid mistakes. The risks of choking under pressure (not making a trade) build.

    All market timers, at times, feel fear. But successful market timers manage their fear, while losing market timers are controlled by it.

    When faced with a particularly stressful decision, it is a perfectly normal human response to revert to the "fight or flight" response. Either we do battle, or flee. When a market timer feels such an emotional response, his or her decisions are very likely to be adversely affected.

    Fear of Loss

    The fear of loss can keep a market timer from executing a trade. Or it can keep him from exiting a trade when the trading plan calls for it. Either can be costly.

    No one likes to have losses, but even the very best timers do. The key is to realize that you are worrying about the results of "that" trade, and not concentrating on executing the plan, which over time will make you successful.

    Trading plans, such as the ones we use here at FibTimer, take time. No single trade makes or breaks the plan. Once you understand and accept that, it is much easier to make the trades without the "fight or flight" response hampering your ability to act.

    Fear of Missing Out on Profits

    This fear is usually felt during runaway rallies. All your friends are talking about the incredible profits they are making every day. If you really look at this in the right perspective, it is a very dangerous kind of fear.

    It eventually causes you to buy in, and of course, when you and thousands of others who feel the same way react at the same time, the market is finally at its top.

    Having a trading plan, and sticking to the trading plan, eliminates this fear. You "know" your plan works, so you are not susceptible to the "greed" factor that comes so easily in market rallies.

    Fear of Losing Profits

    This fear arises when you have a profit, and start worrying about losing it. If you take your profits, you will feel like a winner! But you know this story. The market will likely continue in the same direction, leaving you with an entirely new set of fears.

    Fears cloud decisions. And decisions clouded by fear, that feel right at the time they are made, are more often than not... wrong.

    Again, back to the trading plan. You know what to expect, because you have a plan that "will" succeed over time. It "will" bring in those profits. So a commitment to the "plan" relieves you of the fears of missing out on that quick profit, and the decision that invariably turns bad.

    Fear of Being Wrong

    Consider these next two sentences;

    1. The desire to be "right" is in direct opposition to the ability to be successful.

    2. The desire to be "right" is in direct opposition to the ability to make money.

    A market timer's desire to be right, to be able to tell his friends how successful he or she is, can become so powerful, that a he or she winds up second guessing, the "plan." Taking winners too quickly, or holding onto losers in the hopes that they will come back, or at least break even.

    Conclusion

    To sum it all up, "successful" market timers actually make their profits off the "fears" of the majority of investors, traders, and even other market timers.

    They do this by "sticking to a plan" and not allowing emotions (fears) to rule their decision making ability.

    FibTimer provides the plan. Based "not" on emotions, but on a sound "trading strategy."

    Fear can be conquered when you have a plan. As time passes, confidence builds, and the plan will become easier and easier to follow. Stick with the plan.

    Aug 08 4:57 PM | Link | Comment!
  • Emotions And Trading

    The stereotype of the perfect trader (market timer) has many of the same traits as Mr. Spock on "Star Trek." Mr. Spock looks at events logically and objectively, and follows a rational plan when creating a solution to a problem.

    In some ways, Mr. Spock would appear to be the ideal trader.

    He would carefully formulate a detailed trading strategy, find the market conditions that suggest his strategy will produce a profit, and then and only then, would he execute it.

    But, in the end, it is important to realize that Mr. Spock is a fictional character. And even if he were real, he is a Vulcan; he isn't human.

    Traders are humans, however. In addition, market participants are humans, and they don't always behave rationally. Indeed, they tend to be driven by fear, hope, and greed, and thus, forecasting market behavior has proven much more difficult than space travel.

    In the real world, humans are emotional. Emotions rule everything in the markets. The decision you must make, however, is whether you are going to control your emotions in order to trade decisively and profitably, or let your emotions rule you.

    Realistic And Logical

    The successful market timer is realistic as well as logical.

    It doesn't do you any good to become overly disappointed when have a loss or overly euphoric when you have a big gain.

    Extreme pleasant and unpleasant emotions can be very distracting. If you are angry, frustrated, or worried, you won't be able to focus on sticking to the timing strategy. Your attention will be elsewhere, and those negative emotions can cause you to make incorrect, and usually costly, trading decisions.

    It is essential to keep negative, or unpleasant, emotions at bay.

    At the other extreme, it isn't wise to feel too elated or euphoric. Extremely pleasant emotions are usually the flip side of extremely unpleasant emotions. That is, it is usually those timers who experience extremely unpleasant emotions when faced with setbacks who also experience extremely positive, euphoric emotions when suddenly faced with a huge gain.

    At moderate levels, pleasant emotions are motivating, but at the extreme, they may be associated with impulsive decisions, such as exiting a position for no good reason or abandoning risk control strategies.

    Emotional By Nature

    That said, it is almost impossible to be emotionless. Humans are emotional by nature. It is difficult to experience absolutely no emotion. In all likelihood, the closest we could get to an emotionally neutral state is indifference.

    So what is the best way to cultivate an optimal emotional state? We know that negative emotions, such as fear, anger, and disappointment can be harmful. And we know that euphoria often leads to over confidence and timing errors.

    One possibility is to cultivate emotions that are only moderately positive, emotions that aren't euphoric and prone toward over confidence.

    Rather than react to setbacks with frustration or fear, one can approach the setback with a sense of realistic optimism. Losses are part of the game. There is no way around them. Market timers should focus on the goal of generating successful gains over the long term, not the daily or even weekly ups and downs of the markets.

    Never underestimate the power of emotions. Extreme optimism or pessimism can interfere with your goals, but by approaching problems with a realistic sense of optimism, you will stay the course, stick to the trading strategy, and generate excellent timing profits over the years.

    Aug 01 12:44 PM | Link | Comment!
  • 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!
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