The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Quick Profits vs. Patient Trading: Which Is More Profitable?
09/21/2010 12:01 am EST
This may sound funny, but in market timing, "timing" is everything.
Winning market timers are patient. They know how to control their impulses and to act decisively when a timing signal is issued.
Rather than acting on a whim, winning (profitable) market timers use a tested timing strategy with precise entry and exit strategies and strictly follow them.
Discipline is the key to successful market timing.
Although discipline can be learned, some people are more disciplined and self-controlled than others.
It is useful to determine where you stand on this trait, and if you're impulsive, developing psychological strategies to compensate for it will allow you to time the markets profitably.
Research studies have demonstrated that some people have difficulty delaying gratification.
In the jargon of behavioral economics, they "discount delayed rewards." That is, they would rather take a small profit now instead of waiting for a larger profit later.
Discounting a delayed reward can be a huge problem for a market timer. In any timing strategy, it is necessary to buy and hold (or sell and hold) long enough for one's timing strategy to play out.
There are always fluctuations during the waiting period, sometimes strong ones, but seasoned market timers have learned to wait it out.
Many inexperienced market timers, in contrast, will impulsively sell as the masses panic and buy back at a top, which usually results in a losing trade.
To be profitable over the long term, it is necessary to control your impulse to take a profit and allow the price to rise over time.
Just as the one-armed bandit tempts recreational gamblers, charts and indicators on a computer screen tempt seasoned and novice market timers alike to make hasty trading decisions.
It may be useful to refrain from constantly looking at how a particular index or chart is doing while you're waiting for your timing strategy to play out.
It is also useful to objectify the trade. The more you can learn to view the trade objectively, as if you just don't care what happens, the more you'll be able to resist the temptation to exit a position prematurely.
A cold, rational approach to trading, along with a specific timing strategy, is the best defense against impulsive trading decisions.
Patience Is a Virtue
Patience is a virtue when attempting to time the markets profitably.
It is useful to remember that humans have a strong, natural tendency to avoid risk and loss at all costs. This tendency often protects us from harm, but there are times when it can compel us to act impulsively.
We are naturally inclined to avoid losses at all costs, even if it means exiting a potentially winning position before the timing strategy issues a signal to do so.
Unless one can allow winning positions to increase in price sufficiently, profits are unlikely to balance out losses. All strategies have small losing trades. This means the winning trades need to be allowed to run as long as possible to obtain maximum profits. Profitable trends tend to last much longer than anyone expects.
The ability to control one's impulses and wait for larger, delayed rewards is vital for the successful market timer.By Frank Kollar of FibTimer.com
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