What is Market Timing?

When technical analysis is used in an attempt to find the best entry and exit points for a market, it is commonly referred to as market timing. Past prices and other historical data is used to forecast future price movements. Market timing can be employed both intra-day and more long-term.

timingThe idea of marking timing is of course an alluring one. Imagine using historical data to accurately predict exactly when to buy and when to sell, for maximum profit. However, market timing isn’t a science and there are notable risks associated with relying heavily on technical analysis to determine when to open and close positions. Market timing works best when employed together with other methods. It should be one of many tools in your tool box – not the only one.

Many experienced traders develop their own tailor-made market timing models over time, in order to increase their chances of being in the market when it goes up and then getting out of the market at an opportune time. Many times, successful market timing models are highly specialized in regard to security type, industry, country, etc. Your own risk-willingness should also be taken into account, since you might have a hard time actually sticking to a market timing method that goes against your risk willingness and your aversion to loss. Where on the continuum to you fall, between “one bird in the hand is worth two in the bush” and “fortune favors the bold”?

Aspects of market timing

  • Asset allocation
  • Charting
  • Momentum investing
  • Quantitative analysis
  • Neural networks
  • Genetic algorithms
  • Fuzzy logic
  • Non-linear techniques

Market Timing Tips

  • Before making any decision, take a step back and look at the whole picture. Focusing too narrowly on signals and chart patterns can cause you to miss other important clues regarding market direction.
  • Standard market timing methods tend to under perform in bull markets. You might need to tweak them to find a balance that’s optimal for you and your goals.