Market Timing, Risk and Profits

There is a correlation between market timing, risk and profits.

The better you are at timing your trades, the lower your risk exposure and the higher your profit potential.

For example, suppose that the market (pick any) has made a bottom at 100 and eventually tops out at 300.

And suppose that you use a protective stop-loss (recommended) every time you enter a trade.

When buying into a market, you normally place your initial stop-loss just below the low of the day you enter long.

So which would provide you with less risk exposure?

A. Buying at 145 with a stop-loss at 99, or…

B. Buying at 115 with a stop-loss at 99.

The correct answer of course would be ‘B’, as this would give you an initial risk exposure of 16 points as opposed to 46 points.

What is the difference between the two entries?

The difference is that with better market timing the trader is able to enter closer to the bottom with option ‘B’ and therefore has less risk exposure to deal with.

In addition, because of getting in closer to the bottom of the market, this allows for more upside (profit) potential as well.

By entering at 115 rather than 145, there is an additional 30 points available for the trade.

Naturally this example is extremely simplified, and this article is not about buying the very bottom or selling the very top of any given trend.

The example is only to illustrate that the better your market timing happens to be, the less risk exposure you will have and the higher potential for profit.

Understanding this should prompt the trader to devote a good amount of time and energy towards enhancing his or her market timing skills and resources.

Traders need to be good at timing to go along with other important facets of successful trading, such as good money-management, good risk-management, overcoming fear and greed, trading with the momentum and trend, etc.

There are many available tools and resources to help traders become better market timers. The key is to test and determine which is better for you and your goals.

As a trader of 30 years now, I have spent three decades honing my timing skills. Spotting when the market is most likely going to make bottom or top is much easier today than it was years ago due to accumulated knowledge and practice. When I talk about market timing, I am talking from a wealth of personal experience.

Anyone can improve their market timing skills without having to invest a great amount of money, but some time is required. The more time invested the better you will get.

So allow me to point you in the right direction.

Avoid the fundamentals as your main resource for market timing. News and rumors have little value if any.

As for Government reports, they have value as to ‘when’ they are released more than what they contain.

The reason for this is that, depending on the level of importance certain reports have on certain markets, the markets often will react to their release.

However, the direction a market moves based on what a report says can often be contrary to how it acted to a similar report previously.

Technical Analysis is the best approach to market timing. This is not limited to technical indicators.

Other valuable technical approaches fall under esoteric areas of analysis, such as seasonals, Gann analysis, Cycle Analysis, market geometry, etc.

Be open minded as you embark on learning ways to time the markets better. Do not dismiss something just because it is not commonly used by the majority.

Keep in mind that the majority are on the losing side and you will understand my recommendation to be open.