Stock Market Trading
What is Market Timing?
As soon as you come to the stock market and begin to analyze with the intention of placing a trade, you are involved in the process of market timing, no matter what type of analysis you use (technical analysis, fundamental analysis, or news analysis, etc).
By definition, market timing is considered to be a strategy of making buying or selling decisions of any financial assets in the market. Basically, market timing is an attempt to predict (forecast) future market price movements of a tradable financial asset (stocks, options, commodities, funds, etc).
The price movement forecasting could be based on a variety of financial information. These may include a market outlook or economic reports, analysis of financial news and announcements, analysis of patterns on the charts, analysis of technical and fundamental indicators, investor sentiment analysis, monitoring of interest rate trends and actions of the Federal Reserve, and overall market valuation.
The purpose of market timing is to provide investors (traders) with an opportunity to acquire some certain degree of confidence in possible future price developments. If we decided to specify the purposes of market timing, we would have three main objectives: to define periods (moments) that are good for buying, to define periods (moments) that are good for selling and to recognize periods when it is better to stay away from trading. The overall reason for a market timing strategy is to beat the "buy-and-hold" trading strategy, which is commonly used by funds.
For many investors the ultimate goal is to beat the performance of the main U.S. indexes â€“ the Dow Jones Industrials (^DJI), S&P 500 (^SPX), the NASDAQ 100 (^NDX) and the Russell 2000 (^RUT) indexes. If a trading strategy or trading system cannot outperform these indexes, there is no reason to use it. In that case, it would be better to invest in Exchange Traded Funds (ETFs) that track indexes - QQQ, SPY, DIA, IWM. By investing in the index tracking funds, there is no need for fundamental analysis. It is already done by fund managers (removing weak stocks and adding strong stocks to an index's basket) and the "buy-and-hold" trading strategy of indexes require no technical analysis or market timing at all.
An example of the simple "buy-and-hold" index trading strategy for S&P 500 could be to buy SPY(S&P 500 tracking stock) whenever the S&P 500 index drops by 5-7%. This strategy doesn't involve any analysis and doesnâ€™t rely on market timing. Over longer period of time (e.g., 10, 15, or 20 years), if a trader is consistent, this strategy should produce profits, although not necessarily large profits.
Still, in many cases even "buy-and-hold" investors use elements of market timing. For them, the purpose of market timing is to avoid major price declines. As a strategy that is opposite to the "buy-and-hold" trading strategy, market timing is considered to be the main strategy to use to trade the market, when it comes to short-term trading.
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