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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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  • Is Volatility A Four Letter Word?

    Considering the week just past, with triple digit Dow point swings almost a daily occurrence, we thought this article on volatility to be timely. The majority of investors see volatility as not only dangerous, but something to be avoided at all costs. They equate volatility with risk. But volatility and risk are two entirely different things.

    To market timers, volatility is the precursor to profits. To have no volatility would be to have no profits.

    In addition, to single out one period of time when volatility is causing losses, is to miss the big picture which shows that, over time, volatility is the main ingredient to making huge profits.

    Controlling Profits?

    Consider this example of volatility.

    Let's say that you enter the market with a starting sum of $10,000 and the market enters a substantial uptrend and you are ahead by 30%. Your original $10,000 is now worth $13,000.

    Then the market reverses and you drop down to $11,500. Is this a reason to panic?

    If the trend is still intact, it is not.

    As trend followers, if we are still in the same trend, we may very well now move up to $15,000 or higher in short order. This is what trend following is all about... riding a trend to the end, not exiting at the first retracement.

    But many traders would be devastated at dropping from $13,000 down to $11,500.

    Too many market timers get upset for the wrong reasons. There is no way to control how profits are made. We can only ride the trends, as far as they will go, when they occur.

    Market timers who follow trends have greater upside volatility than downside volatility because they exit losing trades quickly with small losses and stay with winning trades until the profitable trend ends.

    The important thing to remember is that we stay with profitable trends, often for a long period of time.

    When we start a profitable trend, we often make our profits in quick bursts of "volatility." That is why volatility is our friend, not our enemy.

    We generate strong profits by correctly determining profitable trends and minimizing the cost of failed trends with quick exits.

    When we have periods of sideways, non-trending markets, where there is no long term trend, we do not allow losses to accumulate.

    When the market does break out into its next big trend, whether it be to the upside or to the downside, that is when we make our profits. And we do not exit the trend early. Exiting to protect profits assumes you "know" ahead of time when a trend will end.

    No one knows ahead of time.

    So we must allow the trend to complete before we exit. That means we will catch the "majority" of the trend, when it occurs, as profits.

    Huge Volatility Equals Huge Profits

    Invariably, the best profits come with the highest volatility. That means as trend followers, we must react to changes in trends, stick to our guns and make all the trades.

    We may have some small losses when trends fail, but when the market finally breaks out (or breaks down), we make huge gains by riding the new trend as long as it lasts, to the upside in our bullish only strategies, and in both directions (long and short) in our more aggressive strategies.

    By following a set of rules, we do not have to agonize over protecting an open profit, nor do we need to constantly change our strategies to find ways to reduce volatility.

    The question is not how to reduce volatility, but how to manage it with proper risk management. This means not allowing failed trends to accumulate losses, and not exiting profitable trends early.

    Skeptics

    Skeptics mistake volatility, used by trend timing strategies to make profits, as negative. But the opposite is true.

    There is a big difference between volatility and risk.

    Many investors see them as the same. But embracing volatility while controlling risk (cutting losses) is the key to successful trend timing.

    We may see periods when profits are nonexistent for months or more. We may have several failed trends that generate small losses. But successful trend timers see these periods as the base for the next huge profitable trend.

    In fact, we know extremely successful market timers who get excited when they see periods of sideways, non-trending markets as they know what comes next. The next huge trend is right around the corner! The longer the sideways market, the more profitable is the coming trend.

    Unfortunately, many who do not understand the logic of market timing by trading trends are not around when the big trends occur. They are sitting at their computers trying to find a new strategy that will guarantee gains while never allowing losses.

    This is an impossible goal.

    Losses are inevitable. But so are the gains that are achieved by trend following strategies, taking the trades, minimizing the losses when trades (trends) fail, and riding the inevitable big trends for all they are worth when we get them.

    Feb 14 1:47 PM | Link | Comment!
  • Beliefs Of Successful Market Timers

    Successful market timers, meaning profitable market timers, have several common beliefs that help them achieve consistent profits.

    On the flip side of this, those who are unsuccessful also have a set of common beliefs.

    It is a good idea to know which beliefs will help you to succeed, and which ones you may have, that need to be changed.

    Beliefs of Successful Market Timers

    1. I will not jump into a trade before or after a signal just so that I can be participating.

    2. I recognize that discipline is not a concept, it is an absolute necessity. The markets have a way of removing money from undisciplined market timers.

    3. I realize that what happens today, this week, or even this month, is not what is important. What "is" important is my success over time.

    4. I realize that losses are part of trading. No strategy is without losses.

    5. I accept that sometimes my investments will under perform the market, knowing that over time, they will outperform the market.

    6. I know that following a timing strategy through good times and bad are what will make me successful.

    7. I can follow a strategy for the long haul and stick with it, even when at times it is discouraging.

    8. I accept that following a timing strategy will require me to make frequent trades that may seem like mistakes. A string of small losses will not make me quit.

    9. I can ignore the mass media, which raise emotions and thus increase the risk of not executing a trade. It is often the trade that is hardest to take, that winds up being the most profitable.

    10. The markets provide a constant stream of opportunities. If I miss an opportunity, another one will follow.

    11. Keeping losses small and letting profits ride is not just a Wall Street saying.

    Beliefs of Unsuccessful Market Timers

    1. I must be trading all the time to be successful. I am uncomfortable when in cash.

    2. If my strategy is not doing what I think it should, I will make a change immediately.

    3. If I lose on this trade, I feel like a loser.

    4. If the market is rallying, I must get in even though my strategy gave no signal for it.

    5. I am unlucky.

    6. I get very upset when I miss a rally, or if I am in a bullish position when the market is declining.

    7. I dread adverse news events and constantly worry that something will happen to make the markets go against me.

    8. I can't afford to lose anything on this buy or sell signal.

    9. I can't go broke taking small quick profits.

    10. When this losing trade gets back to even, I'll dump it.

    Final Notes on Unsuccessful Timers

    Unsuccessful market timers tend to see the stock market as a place that will give them future riches and solve all their problems.

    Unsuccessful market timers have difficulty coping with the reality of being wrong. When events don't live up to their hopes, they seek to ignore them.

    "As a successful market timer, you have to move from a fearful mind set to a psychological state of confidence. "

    If their timing strategy gives a sell signal and they have losses in that position, they have a difficult time executing the sell signal and they will hold the position so that they can exit when it gets back to break even.

    When things go bad, they often exit with huge losses and blame the strategy, the timing service, the markets. Everyone but themselves.

    Many market timers give up because they are usually too quick in judging small loses as a system that is not working.

    Giving up is the most common way a market timer can lose. You will win only if you execute the timing strategy. Every trade.

    Paper trading cannot simulate the psychological aspects of trading with real dollars. Once a market timer has experienced what it is like to keep trading through a draw down and how good it feels to follow the strategy through the good, the bad and the ugly days, he or she will not be as easily swayed again by adverse markets.

    Final Notes on Successful Timers

    Successful market timers know how to follow a strategy. They know the stock market is not a game and the only way to succeed is with a plan.

    As a successful market timer, you have to move from a fearful mind set to a psychological state of confidence.

    You must use a strategy that builds confidence by keeping losses small and letting profits ride when the markets trend.

    Do not focus too much on each individual buy and sell signal. It is where the strategy takes you over years of trading that is important.

    Feb 07 10:36 PM | Link | Comment!
  • Quick Profits Vs. The Virtue Of Patience

    It is not enough to have a successful market timing strategy if that strategy is not traded with discipline. It is also not enough to trade with discipline if you are overly aggressive with those funds allocated to market timing, and cannot handle the resulting volatility.

    Many market timers think that the more they trade, the better they will do. But in reality, market timers do not need to trade aggressively to do well. Four critical issues; strategy, discipline, money management and diversification are discussed below.

    When the market has a prolonged down trend, such as the 2008 bear market, a more aggressive strategy, using bear funds, will achieve huge gains. But when the bear is not growling, a less aggressive approach usually works much better. And of course, no one knows ahead of time when that bear market will occur.

    Our very Conservative S&P Timer, which only averages about one trade per year, has a superb long term track record and was in money market funds for both the 2001-2003 and 2008-2009 bear markets.

    So, much depends on a market timer's expectations. Are you looking for gains over a long time frame, during which bear markets are sure to occur, or must you see immediate or constant gains in order to stay with a timing strategy?

    Market Timers Must Have An Edge

    At FibTimer, our "edge" is trading trends. We know that the financial markets are usually in a trend, either up or down. In fact, history shows us that they are in trends about 80% of the time.
    This "knowledge" is our "edge." We know that there are times that the markets are not trending, but that these times do not last long. We keep our losses small during non-trending markets using disciplined risk management. And, by trading every trend that occurs, we know absolutely that we will never miss a trend.

    By limiting losses, and allowing profits to ride, we use our "edge" to time the markets with great success. There is an old saying that applies here; "Limit your losses and the profits will take care of themselves."

    Disciplined Execution

    Once you have an edge, you have to be able to execute. The common trading errors of not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you "think" a signal will be issued soon, can be a disaster to your profitability.

    By not sticking to a plan, you allow emotions to rule your finances, and that places you right in with the majority of investors. Those who are the cause of the market's volatility. The "herd" followers.

    At FibTimer, all of our strategies are non-discretionary. Emotions are not allowed. Our strategies offer disciplined execution of non-emotional buy and sell signals.

    The reason for following any timing strategy is to "remove" yourself from making emotional trades. To remove yourself from the herd, which is often headed in the "wrong" direction.

    A second reason for following a non-discretionary timing strategy is that is gets you "out" of losing buy and sell signals fast while limiting drawdowns. You are not subject to the psychology of trading. To holding onto a trade in hopes it will come back to profitability. Then exiting, finally, in a panic after huge losses.

    The disciplined execution of a timing strategy avoids all of these pitfalls. You just follow the buy and sell signals with the absolute assurance that your losses will be limited and you will never miss a trend. Over any fair time frame, you will beat the markets.

    Effective Money Management

    Overly aggressive investment allocations can ruin even a good timing strategy with excessive drawdowns, while overly conservative allocations of capital will not optimize your total returns.

    If you are a conservative investor who wishes to use market timing to protect against losses in a bear market, do NOT invest 100% of your funds in an aggressive bull and bear strategy that you are not prepared for. Yes, they make a great deal of money over time, but aggressive strategies do have more frequent buy and sell signals, and more frequent small losses.

    If as a conservative investor you are unable to handle those losses, you are likely to exit the trade, thus locking the losses in, at just the wrong time!

    Stick to strategies that fit your emotions. Market timers should know themselves and use timing strategies that they will be able to stick with over long time frames. Patience is the market timing key to success!

    Diversification

    Even aggressive market timers should not time 100% of their funds in a single aggressive strategy. Diversification is not just a word., it is a prerequisite to having a successful timing strategy.

    At Fibtimer, we rarely invest more than 20-30% of our own funds in bear strategies. The rest is diversified (see the Diversified Portfolio).

    Using at least some diversification takes the stress out of investing, and makes it much easier to follow buy and sell signals with discipline.

    Conclusion

    At FibTimer, we never question buy and sell signals and follow them faithfully. Over the years, our disciplined approach has resulted in superb gains. We hope that we can instill this disciplined trading into all of our subscribers.

    It does not take blind faith. What it takes is a realization that our own emotions and instincts are usually wrong, and that a non-discretionary timing strategy that trades all trends and limits losses in non-trending periods, is the most successful approach to profiting in the stock market.

    Once you realize this, you will relax and allow the strategies to successfully grow your investments as they are designed to do.

    Feb 01 3:37 PM | Link | Comment!
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