Market Timing Discipline, Not As Easy As You Thought

03/11/2015 6:00 am EST


Frank Kollar, of, not only discusses the importance of traders developing a strategy for market timing discipline, but also maintaining that discipline and adhering to an optimistic yet realistic trading attitude on a consistent basis.

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 ten 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 yearend trade that began the current market advance been ignored, there would be no profits such as we had in 2012 and 2013.

Discipline is key. It is vital to take whatever steps are necessary to maintain discipline and take every trade.

NEXT PAGE: Use the Volatility of the Markets


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, 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.

Only by maintaining discipline can you realize long-term success timing the markets.  

By Frank Kollar, Editor,

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