Did you know that 55% of Americans own stock according to Gallup? If you are interested in investing in the stock market yourself, then you might have heard of market timing but are not completely sure what it is all about.
Keep reading to learn everything there is to know about stock market timings.
- When Is Market Timing Used?
Even though it is hard to execute a market timing strategy on a regular basis, investors are attracted to it because of the potential it has to bring in a large fortune overnight. Instead of other forms of investing where it is a long time waiting this usually has a quicker return.
Market timing is mostly used by professional day traders, financial professionals, and portfolio managers. A lot of time has to be devoted to analyzing economic forecasts. It is always wise to take up some stock market training to help you be more successful.
- Fundamental Analysis
One of the analysis techniques that is used under the market timing strategy is fundamental analysis. This is when an analyst looks at the variables that affect both buying and selling decisions. The market timing aspect is the mathematical function of this variable.
Fundamental analysis is used for the long term to mid-term investment.
- Technical Analysis
This analysis is mainly used for short-term or mid-term investments. This is where the market timing becomes a function of the past performance the stock has had. The analyst examines the history of investment behavior before making any decision to invest or not.
Advantages
One of the benefits of using market timing strategy when investing is that it allows a trader to shorten the effects that come with market volatility. Another benefit is that it is used to maximize profits and also offsets the risks that come with higher gains.
Disadvantages
One of the main disadvantages is that a trader has to follow up on market movements on a consistent basis. It can become very time-consuming trying to keep up with the trends constantly. Another disadvantage is that there are higher transaction commissions and costs associated with market timing strategies.
Also, do not forget the tax consequences that come with buying low and selling high. When securities are held for less than a year which is what most market timers do, the profits are taxed at a higher rate. Uncle Sam will tax those profits as short-term capital gain rates which are a lot higher than the long-term capital gains rate.
Timing Tips
There are a few tips that will come in handy if you choose to give market timing a try. This short list below can save you from losing money, but remember any time you make an investment you run the risk of losses.
Watch the Calendar
You want to study a few different cycles before making any decisions because different strategies favor certain times of the year. For example, tech stocks tend to perform well from January and into the early summer. Then, in November and December, it slows down again.
Another time period to keep an eye out for is between May and October when most stocks tend to go down. The key is to remember that these calendar trends are not set in stone and they can vary depending on the stock.
Buy Near Support Levels
You NEVER want to get your feelings and emotions involved after you see an earnings report. You always want to take a look at where the current pricing is in relation to the resistance levels and monthly support. the best thing you can do is to find when the buying equity is coming off a deep base on high volume or it has broken out to an all-time high.
Build Bottom-Fishing Skills
A trader is taught to not catch the falling knives and not to average down. But, investors do benefit when they are building their position in a stock that has fallen fast and hard but has characteristics of bottoming out. This is a logical strategy that makes sense to buy a portion of a stock.
If you ever notice the floor break you want to execute an exit plan that will dispose of the entire position either above the capitulation price or at the capitulation price.
Hold Until It’s Time to Sell
If you are not seeing your investment go up then you might want to just be patient and take a more passive approach. This means that you might see your money dip but you trust that long-term it will eventually go up. What we recommend is to analyze the history of the stock to see how it did after a dip.
It is always a good idea for you to set your own price to exit for each position you invest in. This will help you lose less money than if you hold on for dear life and the stock never goes back up or the company ends up shutting down.
Feeling Like a Market Timing Pro?
We hope that now that you know more about market timing thanks to our guide above, you can make some informed decisions about where you want to invest your money. Please do not forget to only invest money that you can afford to lose because the stock market is not a guaranteed win.
Did our blog post come in handy today? Browse around the rest of this section for some more finance tips.
