Market Timing: Understanding the Challenges & Risks

Market timing is one of the biggest issues for investors in the market today. Some believe that they can time the market while others think that it is completely impossible to do so. Here are a few things to consider about market timing and why it is very difficult.

Market Timing

The subject of market timing deals with an investor trying to accurately predict what is going to happen in the stock market in the very near future. They will look at technical indicators and use them to make a trading decision. The investor tries to get in right before the market moves in their favor. Market timing can also deal with trying to get out of an investment at the right time. For example, they might own a large number of shares in a particular company. They believe that the price of the stocks of that company is going to decrease in the near future and they liquidate their shares to avoid a loss.

Day Traders

Day traders regularly engage in market timing. The individuals that make multiple stock trades per day are trying to take advantage of small fluctuations in the price of a stock. Everyone that engages in this practice is trying to time the market.

Long-Term Investing

The opposite approach is long-term investing. With this type of investment strategy, you are going to invest in a certain amount of stocks and then keep them regardless of what is going on in the market. You will buy and sell based on information about the company and overall economic factors. You will also buy and sell based on personal factors. For example, if you need to get a certain amount of cash, you might decide to sell your stocks. However, as a general rule, you are going to stay invested in your stocks regardless of what is going on in the market.

Problems with Market Timing

There are many critics of trading strategies that involve market timing. There have been numerous academic studies that have shown that market timing over the long-term is not as successful as long-term investing. Individuals might be able to time the market over the short-term. They might have a successful string of wins in the market and convince themselves that they know what is going to happen at any given point. However, when they try to do this over the long-term, they will usually not make as much money as a trader that has allocated a certain percentage of their portfolio to stocks and stayed with them.

Value of Market Timing

Even though market timing is generally not successful over the long-term, you can integrate into your trading strategy in some capacity. For example, if you know that you are going to buy a particular amount of stock, you might use technical indicators in order to help you choose your entry point into the market. However, relying on market timing beyond that can be very risky.