The importance of market timing cannot be described by only one thing. There are several reasons why anyone interested in trading futures and commodities, forex, ETF’s and stocks would want to hone their market timing skills.
The biggest single important reason that comes to mind is that of minimizing your risk exposure. When there is a lot of money at risk, it is easy to start doubting your original reasons for putting on the trade when the market starts moving against you position.
If you have been trading for any length of time, no doubt you have experienced the emotions I describe. First, perhaps you do a little trend forecasting using some Gann or Fibonacci technique, or your favorite indicator. You feel pretty confident about the decision to go long the market at a particular price and therefore you enter precisely as planned.
Maybe the market starts to move in your favor right away. You feel real good that you have made the right decision. But then, as markets usually do, it also moves against your position. Maybe it moves against you a bit more than you have anticipated initially. Yes, you were wise to have also placed a stop-loss order, but if that order is hit, it is still a lot of money that you really do not want to lose. As the market still has yet to move in your favor, you start to doubt your decision. You start to check your reasons and wonder if you missed anything. Actually, you look for more reasons to assure yourself that you did the right thing. Meanwhile, something inside of you also says that you are just looking at the rosy side of the trade and ignoring the danger signals. The market moves more toward your stop-loss. You see that the loss would be really small right now if you just exit your position. But you do not want to do that because you also have seen the market immediately move in your favor as soon as you bail out.
What started as a shoe-in for profits starts to feel like a fool’s move. The reason you feel this way is that you lack strong confidence in the method you used in your market timing analysis. What really makes things difficult for you is that you are risking more on the trade than you are really comfortable with. But why did you risk as much as you did? Because you really do not know when the market will finally make bottom (or top if you are shorting) and finally go your way, so that you can time your trade as close to that bottom or top as possible to keep your risk exposure low.
Think about that for a moment. If you had tomorrow’s newspaper today for the AUD/USD or Oil futures, where would you enter these markets? If oil futures are making a bottom low, you would naturally go long just off that bottom low, right? And where would your stop-loss go? Easy, right below that low. You would be risking very little (actually, nothing since you know the future, but this is just an example and not reality) because you would have a high degree of confidence that the low would hold.
Having a good market timing method is all about forecasting trends of both the short-term and long-term where you can feel confident that the odds of the current bottom low or top high is likely to hold so that you can place your stop just beyond it. While you are not going to be right all the time, a good market timing method simply means being right enough times that you have enough larger wins to offset your small losses.
Imagine how you would feel entering a trade with a stop-loss that you knew if it was hit you would not be losing much money. Now consider that you are not arbitrarily putting your stop-loss anywhere, but in a logical price location because your market timing method has proven effective in isolating areas of support and resistance, or perhaps also effective in isolating the day or week when a bottom or top is most likely to form.
It is said that WD Gann was a master at time and price analysis. According to several accounts, it is said that his market timing methods allowed him to pinpoint price levels that would most likely hold against a further push of the market. If this is true, and I have seen enough to know that it is, this means that anyone willing to invest the time and a little money towards learning trend forecasting market timing methods could reap huge rewards for the efforts put forth.
During the last few months, I have personally produced a few videos on YouTube that demonstrated forecasting trends of various time frames using market timing methods like the Gann Wheel using a Gann Software program called the Square Timer. It is really a Gann Calculator program that performs the Square of Nine calculations William Gann has made famous.
These demonstrations have proven on many occasions to be effective in trend forecasting. By using these market timing methods, it has been possible to put on trades where the risk exposure is quite low. This allows for a much calmer trading experience and therefore makes it easier to fight against the natural inclination of self-doubt.
It is well known that ‘fear and greed’ are a traders worse emotions. While the ‘greed’ part is not really helped by improving market timing that I am aware of, the ‘fear’ part is greatly reduced by improved market timing techniques.
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About the Author: Rick Ratchford is an analyst, trader, author and speaker specializing in the forecasting of market tops and bottoms in the Futures/Commodity and Forex markets. Members of his Precision Trading Membership learn weekly when to expect upcoming tops and bottoms in the major Futures/Commodity and Forex Markets. He has helped many traders since 1996 to better time the markets. For free timing newsletter, go to: http://www.amazingaccuracy.com.