When is the right time to be bullish? When is it the proper time to be bearish? When is it best to sell all your holdings and sit on the sidelines in cash? As an investor, you will be troubled with these decisions. It is a constant mental-emotional struggle you deal with every day.
Can you time the stock market? We are told that by very respected investors that it is useless to try to time the stock market. They tell you to study the company’s fundamentals, and buy the stock if it looks right to you. Buy and Hold is their prescription for making profits over time. This can work, but is extremely time consuming and if you choose the wrong stock, you lose. Studying the overall market, you would have lost over 27% over the last 10-years. The S&P 500 index of 500 stocks was used to make this statement – take a look. How much sense does it make to buy and hold over a 10-year period just to lose money?
Flawed ways to time the market Here is a list of trading methods that may sound ridiculous to you, but believe me, people use these.
**Buy & Hold – Hasn’t worked over the last 10-years
**Buy a mutual fund and let the “experts” invest your money for you – similar to buy and hold
**Dollar Cost Averaging – Invest a fixed number of dollars in the market every month
**Invest in Utilities – Buy stocks for their dividends
**Turn off your TV and don’t listen to the talking heads
**Listen to tips on stocks and great opportunities
**Use Money Magazine to discover investing opportunities
**Purchase ten to fifteen advisory services
Market Timing & Emotions Find a good timing service that has a history that they display for you to see on their website. Once you have found the service that you like, you should approach it scientifically. To be successful, you will need to take every trade – make sure that the amount you invest is small enough that you can afford to lose it!
You will be given signals that turn out to be wrong and you will lose money. Some of the signals will be right, and you will make money. The problem is that you won’t be able to tell which signals to take ahead of time. That is why you need to take every signal. You can see why it is important to limit your investment size to a small amount – you will have to lose some to win some. Keep that investment dollar amount (not shares) constant in every trade. You don’t want to change the size of the investment depending on how good you feel the signal is Keep emotions out of your decisions – hard to do but essential
But, what if I lose three signals in a row? This can and probably will happen. No stock market timing system is omniscient, Have faith in your market timer – be consistent in following the signals. After you have been successful for perhaps a year, or so, then you can take some of your winnings and increase the amount that you invest in each trade. Don’t increase the amount too large, or you will become emotional, and you won’t be able to take losses.
Investors have a good understanding of probabilities and statistics. Generally, we do understand that if you flip a coin 1000 or more times, it should come pretty close to 50-50 win/loss. As people, we tend to go over the past and feel that we could have traded better – This is not fair – Monday morning quarterbacking If you do think you can out trade a good timer service, then you have to also believe that you are one person in 10,000 There are a few, very few, people who know just which stock to buy and when to buy it. Who knows, perhaps you are a person with those abilities.
In summary: Get rid of the timing methods that don’t work. Take a small amount of your trading equity and follow a timing system that has a good history. It isn’t easy to follow a market timer, but if you do it right, you will win…and over time, you can win very big.
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