One of the lesser known tactics in the trader’s arsenal is market timing. Like any stock market tool, it has its uses and pitfalls, but a well-prepared trader can take advantage of good market timing to boost their portfolio.
What is market timing?
The idea behind market timing is that the stock market is, to a certain extent, predictable. Although individual stocks will always behave erratically, overall there are predictable trends and patterns that a trader can research and use to forecast future movement. (It is similar to the idea that historians and sociologists have about people; you cannot predict the actions of a specific person, but you can do a much better job when it comes to a few million.)
Market timing, then, is when a trader tries to invest around this forecasting.
How exactly the trader tries to time the market depends on the individual. Some will use technical indicators, others will pull historic patterns, while still others try to use current market conditions. Whatever your personal style, the end goal is always the same: to predict where the market is headed and try to time your trades ahead of it.
What is market timing software?
The thing about market timing is that it can involve data… like, an enormous amount of data.
That is not always the case; some market timing systems try to ride broad, historic trends instead. However, the more sophisticated approaches rely on technical indicators as well as past performance data, and that can get very data- and calculation-intensive.
That is where the computers get involved. Traders use timing software to do three main things:
- Handle the enormous volumes of data that can come with not only predicting market movements but also predicting what investments to make in response.
- Keep realtime information. A trader cannot follow the market movements 24/7, but a piece of software can.
- Track and present the information. The challenge with handling that much data is not just crunching the numbers. It is often figuring out how to look at your results and pull out useable conclusions. Market timing software is often as much about presenting the data in a smart, useable way as it is about getting those results.
How can it help your portfolio?
It can help by staying ahead of the curve.
A good market timer can sell before the stock market dips and buy before the market gets hot. For options traders, this is particularly important since periods of volatility make up the entire bread and butter of stock option trading.
If the stock market, or a certain section of it, is headed towards a predictable shakeup, a well-informed trader can buy up his option contracts ahead of time and take advantage of the volatility.
What are the risks?
The risk lies in getting the prediction wrong.
If predicting the stock market were easy, everyone would be rich. Sometimes market timing works, but sometimes the stock market surprises you. Options trading done right requires good information, professionalism, and a clear understanding about the limits of market timing as an investment strategy.
This is a tactic that smart traders can use to inform good investments, but it is neither a crystal ball nor a magic bullet. That said, market timing is a good skill to learn, and to add to a set of valuable trading techniques.
One of the best ways to do that is to try out the tools yourself, and there is no time like the present to do so. Try Market Timer for one month at a low introductory rate today!