Beliefs of Successful Market Timers
Successful market timers, meaning profitable market timers, have several "common" beliefs that help them achieve consistent profits. On the flip side of this, those who are unsuccessful also have a set of common beliefs. It is a good idea to know which beliefs will help you to succeed, and which ones you may have, that need to be changed.
Beliefs of Successful Market Timers
- I will not jump into a trade before or after a signal just so that I can be participating.
- I recognize that discipline is not a concept, it is an absolute necessity. The markets have a way of removing money from undisciplined market timers.
- I realize that what happens today, this week, or even this month, is not what is important. What "is" important is my success over time.
- I realize that losses are part of trading. No strategy is without losses.
- I accept that sometimes my investments will under perform the market, knowing that over time, they will outperform the market.
- I know that following a timing strategy through good times and bad are what will make me successful.
- I can follow a strategy for the long haul and stick with it, even when at times it is discouraging.
- I accept that following a timing strategy will require me to make frequent trades that may seem like mistakes. A string of successive small losses will not make me quit.
- I can ignore the mass media, which raise emotions and thus increase the risk of not executing a trade. It is often the trade that is hardest to take, that winds up being the most profitable.
- The markets provide a constant stream of opportunities. If I miss an opportunity, another one will follow.
Beliefs of Unsuccessful Market Timers
- I must be trading all the time to be successful. I am uncomfortable when in cash.
- If my strategy is not doing what I think it should, I will make a change immediately.
- If I lose on this trade, I feel like a loser.
- If the market is rallying, I must get in even though my strategy gave no signal for it.
- I am unlucky.
- I get very upset when I miss a rally, or if I am in a bullish position when the market is declining.
- I dread adverse news events and constantly worry that something will happen to make the markets go against me.
- I can't afford to lose anything on this buy or sell signal.
- When this losing trade gets back to even, I'll dump it.
Beliefs of Successful Market Timers, FibTimer Market Timing Editorial - Sunday, January 8, 2005
More important research topics to help guide your investment decisions
- Bad advice is just as expensive as good advice - you don't know the difference until it's too late
- Casinos make money by statistics.
The odds are slightly in their favor which over time and consistent frequent play, makes them rich.
The name of the stock market game is to stack the odds in your favor.
How to put the odds in your favor?
- A good market timing indicator. You are never on the wrong side of the curve for long
- Selecting the best performing stocks
- Profit targets, high probability setups, cost averaging, money management
- A strategy that works for all stocks in all markets
- A mechanical trading system that executes your strategy without emotion
Advantages of a mechanical trading system
- Minimize Emotions. Automated trading systems minimize emotions throughout the trading process. By keeping emotions in check, traders typically have an easier time sticking to the plan. Since trade orders are executed automatically once the trade rules have been met, traders will not be able to hesitate or question the trade. In addition to helping traders who are afraid to "pull the trigger", automated trading can curb those who are apt to overtrade, buying and selling at every perceived opportunity.
- Ability to Backtest. Backtesting applies trading rules to historical market data to determine the viability of the idea. When designing a system for automated trading, all rules need to be absolute, with no room for interpretation (the computer cannot make guesses, it has to be told exactly what to do). Traders can take these precise sets of rules and test them on historical data before risking money in live trading. Careful backtesting allows traders to evaluate and fine-tune a trading idea, and to determine the system's expectancy, the average amount that a trader can expect to win (or lose) per unit of risk.
- Preserve Discipline. Because the trade rules are established and trade execution is performed automatically, discipline is preserved even in volatile markets. Discipline is often lost due to emotional factors such as fear of taking a loss, or the desire to eke out a little more profit from a trade. Automated trading helps ensure that discipline is maintained because the trading plan will be followed exactly. In addition, pilot-error is minimized, and an order to buy 100 shares will not be incorrectly entered as an order to sell 1,000 shares.
- Achieve Consistency. One of the biggest challenges in trading is to plan the trade and trade the plan. Even if a trading plan has the potential to be profitable, traders who ignore the rules are altering any expectancy the system would have had. There is no such thing as a trading plan that wins 100% of the time, losses are a part of the game. But losses can be psychologically traumatizing, so a trader who has two or three losing trades in a row might decide to skip the next trade. If this next trade would have been a winner, the trader has already destroyed any expectancy the system had. Automated trading systems allow traders to achieve consistency by trading the plan. (It's impossible to avoid disaster without trading rules.
- Improved Order Entry Speed. Since computers respond immediately to changing market conditions, automated systems are able to generate orders as soon as trade criteria are met. Getting in or out of a trade a few seconds earlier can make a big difference in the trade's outcome. As soon as a position is entered, all other orders are automatically generated, including protective stop losses and profit targets. Markets can move quickly, and it is demoralizing to have a trade reach the profit target or blow past a stop loss level, before the orders can even be entered. An automated trading system prevents this from happening.
- Diversify Trading. Automated trading systems permit the user to trade multiple accounts or various strategies at one time. This has the potential to spread risk over various instruments while creating a hedge against losing positions. What would be incredibly challenging for a human to accomplish is efficiently executed by a computer in a matter of milliseconds. The computer is able to scan for trading opportunities across a range of markets, generate orders and monitor trades.
The Pros And Cons Of Automated Trading Systems, Investopedia - August 24, 2011