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Successful Market Timing
by David Elliott
The goal of all market technicians is market timing. This Holy Grail is sought by the stock trader, options trader, and futures trader. The market technician is constantly looking for the secret to buying the lows, and selling the tops. Fundamental traders would like some form of market timing, but are less concerned about entry price and more concerned about the published health of a company.
Market timers break down into three groups: Long term "trend followers;" "Swing traders;" and short term "Scalpers."
Long term trend followers typically use the 50 day and the 200 day moving averages to determine market entry and exit. In addition, they use these two averages to give them a bias as to the direction of the DJ-30 Index, as well as other Indices such as the S&P-500. They may also look at the "four year presidential cycle," 10 year cycles, and other popular seasonal trading methods.
Large position traders, such as mutual funds, are almost forced by their size to look to longer term averages so as not to be "whip-sawed" in and out of the markets. In the futures markets the longer trend following systems using these bigger averages are often the most popular for consistent gains. These long term investors usually hold these investment positions from time periods of months to years.
On the "swing trade" front we see shorter term moving averages being used such as the 5 and 20 day, and the 3 and 15 day averages. In addition, these traders use price pivot points, support and resistance, trend lines, pattern recognition, and technical analysis studies to facilitate their market timing. Besides the shorter term studies they will also be aware of the 50 and 200 day averages. There are also traders that will invest following daily moves up and down, using the hourly and ½ hour studies. Their positions may last several days. Most often they hold positions overnight.
The shortest market timers, the scalpers, may invest for several seconds to as long as a day. Scalpers rarely stay in the markets overnight. They often try to take a penny or two in the stock markets, to as much as several dollars in the futures markets. They use a multitude of signals generated by price, bid /ask, and volume, as well as tick and minute analysis. These traders have little interest in the fundamental analysis of their investment vehicle.
The biggest hurdle for most new market timing traders is to understand that there is no such thing as a "magic" number for technical studies that works all the time. What the market does show us is that it has cycles, or waves, to its movements and that those movements can be captured by studies of different length in various market time periods.
So, while the 5 and 20 day moving average may work very well for some periods of time, we will soon find that they too will fail to filter out all the market "chop" in all stocks. Eventually we will find that they get us in and out at the wrong time, and we will have to find pairs of moving averages that are appropriate to the particular market.
One method market timers use to help filter out those possible bad trades is to use other technical studies to sort out those "choppy" markets. Additional help in solving the investment timing issues is found by using computers that apply AI (artificial intelligence), "fuzzy logic," and "black hole" programming to the investment field.
These software sciences have yet to achieve major consistent breakthroughs in packages that are available to the general public. Many market patterns identified by computers change as soon as the pattern is learned by the trading system software. And any successful program would be (and probably is) kept under wraps by the financial institutions that can afford such expensive research. So save the thousands of dollars that you were about to spend on one of the dozens of programs that claim to give you "green lights" to buy and "red lights" to sell!
A replacement for the human mind recognizing patterns and applying profitable investment strategies has yet to be invented. The performance of the mutual funds for these past three years is evidence that the market's secret to investment timing is still safe.
EDITOR'S NOTE: David Elliott has been a highly respected figure in the financial community for over 24 years. He is considered to be one of the top technical analysts and market timers in the nation. David is licensed to teach investing at the University level. He is a very popular Investment Workshop instructor who has taught thousands his secrets to profitable investing. His very accurate Daily Profit Newsletter (which includes information on market direction, charts and stocks to watch) is read by serious investors and traders worldwide each day in the Profit Rite program (www.ProfitRite.com). An abbreviated version of his market commentary is available free at www.MentorMastors.net.
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