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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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  • Trading Fears, We All Have Them. It's How We Handle Them That Counts.

    All market timers, traders and investors, in every kind of market, feel fear at some level. Turn on the news one day and hear that a steep unexpected sell-off is taking place, and most of us will get a queasy feeling in our stomachs.

    But the key to successful "profitable" market timing, in fact all trading, is in how we prepare ourselves to handle trading fears. How we prepare to deal with the risks inherent in trading.

    Mark Douglas, an expert in trading psychology, says this about trading fears in his book "Trading in the Zone."

    "Most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting in too high and too low and causing them to react emotionally, with excessive fear or greed after a series of losses or wins."

    As the importance of an individual trade increases in the trader's mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.

    All traders have fear, but winning market timers manage their fear while losing timers (as well as all traders) are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the "fight or flight" response. We can either prepare to do battle against the perceived threat, or we can flee from this danger.

    When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to "freeze."

    There are four major trading fears. We will discuss them here, as well as how to handle them.

    Fear Of Losing

    The fear of losing when making a trade often has several consequences. Fear of loss tends to make a timer hesitant to execute his or her timing strategy. This can often lead to an inability to pull the trigger on new entries as well as on new exits.

    As a market timer, you know that you need to be decisive in taking action when your strategy dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your timing strategy. This causes a lack of trust in the strategy or, more importantly, in your own ability to execute future signals.

    For example, if you doubt you will actually be able to exit your position when your strategy tells you to get the out, then as a self-preservation mechanism you will also choose not to get into a new trade. Thus begins analysis paralysis, where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.

    Looking deeper at why a timer cannot pull the trigger, a lack of confidence causes the timer to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain.

    No one likes losses, but the reality is that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game both financially and psychologically. The longer you can remain in the trading game with a sound timing strategy, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.

    When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process.

    By following a strategy that unemotionally tells you when to enter and exit the market, you can avoid the pitfalls caused by fear.

    This, of course, is what we do here at Fibtimer. We learned long ago that unemotional (non-discretionary) timing strategies save us during emotional times in the market. We know the strategies work, so we put aside our fears, and make the trades.

    And remember, you must be able to take a loss. Consider them as part of trading. If you cannot, you will not be around for the big gains because you will be on the sidelines guarding your capital against that potential loss.

    Remember that good timing strategies are designed to guard against big losses. Every trade you take has the potential to become a loss, so get used to this reality and take every buy and sell signal. That way, when the next big trend starts, you will be onboard and profit from it.

    Fear Of Missing Out

    Every trend always has its doubters. As the trend progresses, skeptics will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend.

    The fear of missing out can also be characterized as greed of a sorts, for an investor is not acting based on some desire to own the stock or mutual fund - other than the fact that it is going up without him on board.

    This fear is often fueled during runaway booms like the technology and internet bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.

    When you think about it, this is a very dangerous situation, as at this stage investors tend essentially to say, "Get me in at any price - I must participate in this hot trend!

    Could we be in just such a situation now?

    The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a "promising" and "obviously beneficial" trend. But there's nothing obvious about it.

    Remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks in the 90's ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality.

    It is expectation gaps like this that often create serious risks for those who have piled into a trend late, well after it has been widely broadcast in the media to all investors.

    Next week read part 2, the conclusion of this article on "Trading Fears."

    Feb 06 9:07 PM | Link | Comment!
  • Don't Make It Personal

    Veteran, successful market timers and stock traders stay detached. They know that the markets are impersonal and they trade their strategies methodically. But novice market timers (and novice stock traders) often have trouble achieving this rational mind set.

    Stay Detached From Trading Decisions

    For example, novice timers (and traders) may take market timing losses and subsequent drawdowns personally. Seeing it as a hit to their ego, and attaching personal significance to what is just an everyday fact of all timing and trading decisions.

    Small losses should be expected, and it's vital that you don't take them personally. What is important is keeping them small. Never allowing any loss to grow into a big one. That is accomplished by following a timing strategy that is designed to protect capital.

    Disappointment Is Natural

    It is natural for a person to feel disappointed after experiencing a drawdown. Financially, real money has been lost.

    It's perfectly reasonable to feel a little disappointed, but it isn't useful to take it personally. Disappointment is a natural emotion, but not very helpful in market timing.

    In fact, if you take it personally, you might then try to gain back that small loss, by exiting your strategy and taking an ego inspired trade. The odds are good that you will be the poorer for it.

    Market Timing Requires Doing The Unnatural

    Although we spend a lifetime building up an array of emotional responses to help us cope with uncomfortable feelings, those same, quite normal emotional responses are exactly the opposite of what is needed to succeed in market timing.

    Timing requires that you do the unnatural, and control your emotions. A lifetime of learning how to respond to uncomfortable feelings or situations MUST by unlearned to succeed in market timing (or any trading for that matter). Responses that are correct in personal and even business situations, are sure to cause losses in trading the financial markets.

    You expect to make a profit over time, but in the short term, even a winning timing strategy is bound to have losers. That's just the nature of probability theory.

    So why make it personal? Why put your ego on the line with each trade?

    Why brag when you are lucky enough to have the odds work in your favor and then be depressed when the odds go against you? Both emotional responses are normal, yet they are dangerous to successful market timing.

    But how do you control perfectly natural emotional responses?

    "Unlearning" A Lifetime Of Lessons

    When it comes to market timing, you've got to UNLEARN responses that you've spent your whole life learning.

    Market timing isn't about you. It is just a strategy that works over time.

    In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the people who pay you, and you're a success.

    In the traditional workplace, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff.

    But with market timing, the odds can go against you, no matter how much work you put in. The perfect trade can go wrong.

    That's hard to accept for most people because it means that being a successful (profitable) market timer or trader, to some extent, is just a matter of the odds randomly working in your favor. But there is good logic behind this randomness. And a successful timing or trading strategy uses this logic to profit.

    A successful timing strategy will exit losses quickly. It will not stay with a bullish or bearish position to sooth the ego of the strategy's designer. It will also stay with a successful trade and not exit quickly to lock in a profit. That may feel good for a day, but if the profitable trend lasts two, three, five times longer, you have lost out on a huge profit.

    Recognizing that odds are part of trading takes some of the glory out of it. But on the other hand, understanding odds helps you cope with inevitable drawdowns.

    Conclusion

    If you are a seasoned market timer who really has mastered his or her emotions, you are assured that the odds will, over time, work in your favor.

    You will enjoy your times of glory as the gains add up. You will hunker down and quietly follow the signals during unprofitable sideways markets or during failed trends.

    Taking a detached, unemotional approach may take some of the glory out of market timing, but on the other hand, that same unemotional approach is the KEY to market timing success.

    Most importantly, the unemotional market timer will implement the timing strategy. He or she will make each trade consistently, with the certainty that over time the odds will make him or her a successful timer.

    At FibTimer we offer strategies with years of success behind them. But all of them, at one time or another, have had losing trades. Staying with the chosen strategy eventually paid off. Timing strategies are designed to make their profits over time, not in a few weeks or even months, though it is always nice when that occurs

    Remaining unemotional, so that a timing strategy is adhered to not only in easy (profitable) trading conditions, but also during the tough (unprofitable) ones, leads to success in a field where the majority fail.

    Jan 30 12:12 PM | Link | Comment!
  • Discretionary Vs. Mechanical Market Timing Strategies. Which Is Best?

    Investors Or Traders?

    Those who use the stock market to grow their assets have two choices. They can either be investors, which means they are "buy-and-hold" for the long term. Or they are traders who try to use the ups and downs inherent in free markets to profit.

    Buy-and-hold investors have much to worry about. Are they buying in at high prices? When they are ready to retire, will the markets be in a bear market? Obviously those who planned to retire in the years 2000 through 2002 or 2008 faced a great dilemma. In 2000-2002 aggressive buy-and-holders who were invested in Nasdaq stocks, had lost 70-80% of their capital. Even cautious S&P investors lost 50%. In 2008, all indexes dropped some 50%.

    Market timers, who are actually traders using index mutual funds or ETFs as their investment vehicle of choice, recognize these pitfalls. Their goal is to never to give back much capital.

    Yes, there are sometimes small losses in timing, especially at market tops and bottoms, but if you are trading trends (and historically the markets are in trends more than they are not) you will never take large losses to capital as you will exit immediately if the trend changes.

    And... you will make your big profits from the inevitable long term trends when they occur.

    Two Kinds Of Market Timers

    Market timers, trading all trends, are the most successful over time. But even in market timing, there are two ways to determine your trades.

    Discretionary timers depend on the sum total of their market knowledge to make decisions. Whether it be market analysis, a multitude of indicators, gut feeling, current or even potential future news events, hot tips, etc.

    Discretionary trades are subjective. They can be changed and second guessed. There are no absolute guarantees that each individual trade is based reality and is not colored by any personal bias.

    Mechanical timers use timing strategies based on an objective and automated set of rules which avoid the emotional biases inherent in discretionary trading.

    They follow a set of rules to get them into, and out of, the markets. They know that some trades will not be successful, but they also know that they will always be in for the big trades. The ones that make the money and over time make them successful timers.

    Mechanical systems make life much easier by "removing" the emotional aspect

    Based on Price

    Mechanical timing strategies are based on changes in "price." There is no other information in the stock market that is absolutely correct at all times.

    Price tells all.

    It may seem a bit boring using a mechanical timing strategy. After all, where is the fun, the emotional highs, that many traders thrive on.

    But let's get one thing straight: Mechanical timing strategies, which use price to determine trends, are not about fun. They are not about avoiding emotion and in fact they are designed to eliminate emotion.

    Mechanical trading strategies are about "making money." Pure and simple.

    They are about winning.

    Following The Emotional Crowd

    In fact, the entire stock market moves up and down because of millions of investors depending, for the most part, on emotional decisions. Fear and greed. That is why volume spikes near the tops of rallies, and again near to bottoms of corrections. Everyone is jumping on board.

    There may be comfort in following the emotional crowd, but there is seldom profit.

    Mechanical timing strategies, using "price" to determine buy and sell signals, actually "use" the emotional ups and downs of the market to make money.

    The rallies and corrections are going to happen, so if we use price to tell us when they are happening, as trend traders we just jump on board and let the market take us along for our profits.

    Conclusion

    Discretionary traders sometimes have big winners. Toss a coin enough times and it always comes up heads eventually. But the only certain way to be successful for the long haul in the markets is to follow a "non-emotional" trading strategy and to always "stick-to-the-plan."

    There is no second guessing. There are no worries. We know the strategies work over any two or three year period and that can be proved with historical data going back a hundred years or more.

    Trend followers know that the markets are "in" trends most of the time. They also know that at tops and bottoms there will be times of whipsaws where small losses are endured.

    But trend traders who understand the logic of their strategies, are excited at these times. Why? Because those times of sideways non-trending markets are the precursors of the next big trend.

    Be sure to stick to the trading strategies. No one knows what will happen tomorrow, but trend traders "know" they will beat the markets and make great profits over time.

    Jan 23 11:46 AM | Link | 2 Comments
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