Seeking Alpha

TimerFrank's  Instablog

TimerFrank
Send Message
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
My blog:
Market Timing Pro
View TimerFrank's Instablogs on:
  • Investor Or Trader... Which Are You?

    Most market participants consider themselves to be "investors." But if you look at a list of the really big winners on Wall Street, you will see that most of those who make big profits, list themselves as "traders."

    By "big profits" we mean doing better than the S&P 500 Index or Nasdaq 100 Index by a substantial margin over any three-year period.

    Investors

    "Investors" put their money into stocks, real estate, etc., under the assumption that over time, the underlying investment will increase in value, and the investment will be profitable.

    Typically, investors do not have a plan for what to do if the investment decreases in value. They hold onto the investment in hopes it will bounce back and again become a winner.

    Investors anticipate declining markets with fear and anxiety, but unfortunately, they usually do not plan ahead of time how they will respond to them. When faced with a declining (bear) market, they hold their positions and continue to lose.

    We all know investors. In many cases it was us before we realized how dangerous buy-and-hold investing could be to our savings.

    Investors often have some knowledge of trading. But that knowledge is tainted by how it is all too often described in the financial press. Trading is risky, dangerous, foolish, bad, involves a great deal of work, etc. On the other hand "investing" is good, reliable and safe.

    Investors had a taste of what buy-and-hold can do to their capital in the 2000-2002 bear market. They lost again in the 2008-2009 bear market.

    Traders

    On the other hand "traders" take a proactive approach to their investing. Traders have a defined plan and invest with one goal, to put their capital into the markets and "profit."

    They "trade" with a plan that tells them what to do in any situation. When to enter and when to exit. They never allow large losses.

    Being a trader does not mean you must move in and out of the markets frequently. This is a common misconception. A trader simply is one who has a plan for entering and exiting. They know what to do if their trade goes against them, and they know what to do when their trade is profitable.

    Some traders go short (take bearish positions) as well as long (bullish) positions. Some are unable to go short, or they find short positions to be uncomfortable. Probably the majority of traders do not ever take short positions.

    But traders "do" have a plan. This is where they differ from investors.

    Every Trader Needs A Trend

    If you think about it, you will quickly realize every trader needs a trend to be successful.

    No matter what trading method is used, whether it is pattern trading, swing trading, long term buy-and-hold investing, fundamental analysis, technical analysis, buying or selling on news events, IPOs, splits, you name it. If the stock or mutual fund does not trend in the required direction after the trade is made, you cannot be profitable.

    This also applies to all asset classes. Stocks, bonds, currencies, commodities. You must have a trend to profit.

    Putting Trader & Trend Together

    There are two major camps when it comes to deciding what method to use to plan a trade. There are those who follow a fundamental analysis approach and those who follow a technical analysis approach.

    Traders use both methods to "forecast" future market direction. If combined with an exit strategy, either can be successful, but debate has raged for 30 years over which is the most successful strategy, as well as whether either method truly "outperforms" the markets over time.

    Some very astute market players have said that both fundamental and technical analysis approaches, though they can be profitable, usually are "no more profitable than an index fund."

    There is a scary thought. All that work when an index fund could do as well?

    But there is another approach that is almost never discussed. Many hugely successful traders use it though the financial press seldom mentions it. In fact, many who use it are very quiet about their successes. They do not try to publicly prove themselves right, they just trade and make money.

    This approach is the use of price to determine trends. Price does not forecast and it does not predict. Price is always right. If prices are moving up, the markets are advancing. Down and the markets are declining.

    At FibTimer we are "trend followers." We respond to what "is" happening instead of predicting or forecasting what might happen. We "follow" price and allow the changes in price to tell us "when" to enter or exit a position.

    Using price to determine trend does not allow trend traders to enter at the exact bottom, or to exit at the exact top. In fact, trend traders do not try to forecast the market, but instead let the market tell them when to trade and in what direction.

    Trend traders wait patiently for prices to tell them a trend has begun. Then they jump on board. If the trend fails, they exit quickly to control losses. Price tells them when to enter "and" when to exit. If the trend continues, trend traders have no predetermined profit goal. They stay with the trend until it reverses.

    Cutting losses quickly and staying with a trend until it ends is how trend traders realize huge profits in the financial markets. The financial markets are trending "about" 80% of the time. That means trend traders are profitable 80% of the time. During the other 20% trend traders keep losses very small so that they are ready when the next trend starts.

    This does not mean 80% of their trades are winners, just that they are in the plus column for that 80%. If you have three losing trades of 2% and one winning trade of 18% in a year, you finish with a 12% gain, even though most trades were losers. This fits the old saying, "cut your losses short and let your winners run."

    Conclusion

    Remember that "price" is determined by millions of investors and traders.

    By using price, trend traders take advantage of the combined wisdom of millions of investors and traders to trade a successful and profitable market timing strategy.

    Yes, it takes patience to be a successful trend trader. Yes, it takes discipline to follow the strategy and make the trades, which many times go against the prevailing wisdom. This is true of "all" winning market strategies.

    But trend traders who use price to determine trends have been quietly "beating" the markets for many years. They will quietly continue to do so for many more.

    Mar 20 8:15 PM | Link | Comment!
  • 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!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.