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Market Timing and Market Forecasting
A few decades ago, it was widely believed that the most effective way to analyze markets for trade was to determine fundamental factors such as the number of bushels in storage, current demand data, expected harvest yield, etc. Many assumed that Technical Analysis was not useful. The reasons given were that the price movement is random or that it does not take into account the fundamental factors of the underlying asset. The facts are just the opposite.
Many have learned that the old “buy and hold” strategy can be expensive. There are many stories of those who have found their portfolio value has reached zero (or lost value) after holding it for years. The financial crisis of 2008 highlights one of the many historical periods in which investors lost millions. While it is always good to know the financial health of a business and its future sales/profit potential, a healthy financial statement and outlook today may look very different tomorrow.
Technical analysis focuses on price movements, predicting the direction of prices based on their ebbs and flows (ie swings, cycles, etc.). The fundamentals of any asset are built into the price action as the market discounts everything. Furthermore, history tends to repeat itself and this repetitive nature of price action can be predicted and exploited.
Many technicians rely on various indicators to help reveal certain aspects of historical price data to use time. Where one indicator might highlight some underlying cycle pattern that could help predict the next period of trend reversal, another indicator might highlight an overbought or oversold condition in the market, all based on past price action.
A technical analyst relies heavily on price charts. Certain patterns are often repeated, alerting the technician to a possible price drop. Such patterns are given names such as ‘head and handles’ pattern, ‘wedge’ or ‘flag’ formation, etc. All of these technical approaches are useful to some extent.
Accurate market timing is critical in today’s volatile markets. Without more accurate timing, the trader is exposed to a higher level of risk and can leave more profit on the table.
Let me illustrate this.
For the purpose of discussion, let’s assume that the price range of each trading day is 50 points. If your risk tolerance (how far you will allow the market to move against your position) is 50 pips, you must enter the market on the exact day you expect the move to begin in your favor to avoid a stop loss. If your allowable risk exposure is 100 pips, you need to time it accurately within +/- one day to avoid a stop loss. This highlights the importance of accurate market timing.
In the real world, the price range varies from day to day. Depending on how effective your market timing approach is, you may be able to risk less than the average point spread. The less precise your approach to market setting, the more risk you should initially take in trading.
While market timing itself can be done loosely using standard technical indicators, trend lines and moving averages, accurate market timing is achievable with good market forecasting methods. Market forecasting for market timing purposes is extremely effective because unlike most technical indicators which are “leading” or “lagging” in nature, a good market forecasting method can predict a market reversal on the exact day of a trend change. By giving any market forecasting method a small margin of +/- one day, you can give any trader an incredible advantage in predicting market turns for the purposes of accurate market timing and trading.
Some traders are historical legends who used market forecasting methods for accurate market timing purposes. Who hasn’t heard of William Delbert Gann (better known as WD Gann)? This financial trader is known for developing several technical approaches such as the use of Gann angles or the trend indicator. His forecasting methods included the use of the square of nines, cycle analysis and market geometry. He has been known to turn a small amount of money into a large one quite quickly using ‘market forecasting’ tools such as this and others.
I hope you have understood two main points by reading this article. Point no. 1 is that you need to be more precise in your approach to market timing if you want to better manage your risk exposure and maximize your profit potential. Point no. 2 is that the most accurate way to time markets is to take advantage of market forecasting techniques where you can often time your trades on the exact day of a new move.
There are many market forecasting secrets, methods and techniques that you can learn right now to improve your market timing. Some are good, some less so. For more than three decades, I have been learning, testing and discovering market forecasting approaches. When I started, there wasn’t much available like there is today. So, it has definitely seen some growth over the years and therefore you should have no problem finding approaches that will suit your trading and investing style.
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