Understanding Market Timing And How To Profit From It
There is money to be made in the stock market. How you go about investing however is totally up to you. Some investors are buy and hold types. This means they buy a stock, mutual fund or ETF and hold it for the long term. Other investors believe in market timing.
Their goal is to capitalize on the short term swings of the stock market and make money over a shorter period of time.
Neither approach is wrong, but you do hear a lot of experts claim that market timing is a bad idea and you can’t make money over the long term by going with this investment philosophy. While the odds might be stacked against you to make serious money by market timing, you can make money.
In this post, I will walk you through how to time the market and make money in the stock market.
What Is Market Timing?
Before I get into how to make money by timing the market, we first need to have a clear understanding of what market timing is.
Market timing is moving in and out of the market by using technical analysis. This could mean you study charts of certain companies and make investment decisions based on the movement of the stock.
Or it could mean you look at economics, like housing starts, consumer spending, or gross domestic product to make your investment decisions.
Whatever method you choose isn’t important. What is important is that you are constantly moving in and out of the market, trying to earn a profit.
Can You Time The Market?
Now that we understand what market timing is, let’s look at a few of the reasons why experts say it cannot be done successfully.
The reason most often cited is that the average investor doesn’t have the skill or the time to commit to timing the market. As a result, the odds of successfully doing this over the long term are slim.
I would agree with reason. Most investors don’t have the time to devote to a successful active trading strategy. You need to be watching the market all day, every day if you want to make money long term going this route. It is not something you do here and there for a few minutes.
Sure you might get lucky, but will end up losing money long term.
Here are some other reasons market timing doesn’t work for many investors.
- Trading Costs: It costs money to constantly be buying and selling securities. These costs eat away at any gains you may earn. The result is a smaller gain than you hoped for or a loss when trading costs are factored in.
- Taxes: When you make short term gains, you pay a high tax rate. As with trading costs, taxes eat away at your gains and end up costing you money.
- Opportunity Cost: Most long term investors make the majority of their gains over a few short days when the market performs exceptionally well. If you miss these days because you are out of the market, it can cost you a lot of money. This is known as opportunity cost.
After reading this, you may be wondering if you really can make money by timing the market. You can, you just have to have the right strategy.
How To Time The Market
The way to successful market timing is simple. You don’t need to study charts or burn the midnight oil going over economic data. You just have to pay attention to what the market is doing.
Here is why most investors fail at market timing: they buy and sell at the wrong time. Most investors let their emotions take over. They get greedy when the market froths up and they sell when there is blood in the streets.
If you buy high and sell low, you are going to lose money every single time. But if you do the opposite, you will make a killing. All you have to do is buy low and sell high.
Simply wait for the market to drop, buy stocks or mutual funds, and then wait for the market to rise and sell. Guaranteed profits.
Now you won’t know when the bottom will be or the top, but you can get a general idea. And doing this will lead to lots of money earned in the stock market.
Final Thoughts
Overall, market timing gets a bad rap. Most experts tell the average investor they cannot time the market to make money. This is untrue.
If you do the opposite of what everyone else does and sell high and buy low, you will make money over the long term.
Note: The author of this article is Jon Dulin. Jon writes for Money Smart Guides, a personal finance blog that helps readers get out of debt and start investing for their future. He has been investing since he was 16 and has learned a lot through the years. He uses these investment lessons to help him be a more successful investor today. This article originally appeared at Modest Money.
Category: Stocks, Technical Analysis
