A Market Timing technique that is objective using a systematic trading approach eliminates predetermined attitudes to the market. Too many Market Timers are either always Bullish or always Bearish. These people are called Perma’s in the industry. They are either always saying the bad times are coming or the good times are just around the corner. Of, course depending on where we are in an economic cycle, they are both eventually right.
If you are going to use market timing, I would suggest that you need a better approach than listening to high profile newsletter advice that just says “see I told you the market was going “up or down”.
Just as you can go broke holding onto a stock or index going down, you can go broke maintaining a short position in a rising market. The reality of drawdown, margin calls, and psychological factors of being on the wrong side of a market weigh heavily on one trying to follow a newsletter publisher’s advice. How many times do you hear a Bullish newsletter say “Although the market continues lower, we are even more Bullish and back up the truck” only to see your stock go lower still. Or the market timing newsletter say “We have been Bearish and now we are even more Bearish”. Do these people really trade off these calls or do they just sell newsletters.
A systematic trading plan gives Buy, sell, and stopped out signals that take into consideration trading realities. One of the most important issues to look at when evaluating a system trading plan is the equity curve of several years. Look at the chart below of an equity curve of a trading system vs a buy and hold equity curve. I have yet to see a newsletter writer’s equity curve in any of the tracking digests.
The above chart is an equity curve of the S&P 500 over 12 years through up and down markets. (The top line is the systematic trading plan in the upper panel. The bottom line is a Buy and Hold equity curve.) Until I can see an equity curve of a newsletter publisher, I will stick with a systematic trading plan.
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