| Strategies to Time the Market |
--"Though my success rate has been high, I am only breaking even financially, due to getting out too early in profit and letting my losses run too far."
Plenty of times, I guess. The trick lies in timing the market, whether equity or bonds, or whether entry or exit. Timing is of the gravest importance and can change your fortunes overnight.
First of all let us take an existing situation, where you have already invested in the markets. If you are in a trade, you should already have a general plan of action in place, including potential entry and exit points, before you entered the trade. Certainly, you can alter your plan of action in the heat of battle, but you should not enter any trade without having a well-thought-out trading plan. Also in your trading plan you can have a few scenarios that could occur and what you would do if they did occur. Entry and exits points in trades most times should be based on some type of support or resistance levels in a market. For example, in the equity markets at present, many traders think prices are close to a bottom. But I won't enter the market or go long in a contract just because I think it's close to a bottom. I need to see some strength in the market. I will wait for the market to push up through a resistance level and begin a fledgling uptrend. Then, if I do go long, I'll set my sell stop, or a sell bench mark just below a support level that's not too far below the market level at which I have entered. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful.
Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections in a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend.
Exit strategies are as important as entry strategies. When to get out of a market when you're losing money, I have a simple, yet very effective answer: Upon entering the trade, if you place a sell stop or have a sell bench mark below the market if you're long (buy stop if you're short), you know right away how much money you will lose in any given trade. You should never trade without employing stops.
What about when you've got a winner going and good profits already in place? This is the time to employ "trailing stops." For example, if you're long a market and it reaches your initial upside objective, but now you really think there may be more upside and you don't want to exit your trade. You put in a sell stop at a certain level below the market that allows you to stay in the winning trade. But if the market turns south you are stopped out and still have a decent profit.
In his book "It's When You Sell That Counts." Donald L. Cassidy, a research analyst with Lipper Inc. in Denver, says that understanding sell decisions is key to successful investing. So a key is to set a selling target when a stock is purchased. "Your target isn't going to be right," said Cassidy. But it is a starting point, he said, to be adjusted up or down, depending on significant news about the company. It also helps to know in depth about the company and industry being considered for investment. "Bad decisions to buy," he said, "sometimes propagate themselves" into bad timing of a sale. On the other hand, "buying well sure helps you sell easier," said Cassidy.
In case of bonds or bond related funds the entry signal is simple get out of bond funds when rates rise, invest in money funds and re-enter when the interest rate trend is declining. As to the price at which you should enter, record the price of your bond fund daily, keep track of the lowest price you have recorded, when the fund reaches 2.5 percent above that low, consider that you have received a "buy" signal and invest in the fund. Now you are "in" the market, hoping the upward price trend will continue. In case you want to sell look out for the following: continue recording the fund's price daily, make note of each new high price, when the fund price drops to 97.5 percent of its highest price since you bought, you have a "sell" signal. Move your money into a money market fund.
Again, buy back into your bond fund when it reaches 102.5 percent of the lowest price since you last sold it.
But above all remember the stock market is not an anxious game of Las Vegas roulette: In roulette, the longer they stay in, the greater their chance of experiencing a big loss. In fact, history shows the opposite to be true. The easiest way to reduce the risk of investing in stocks -- and improve the gain -- is to increase the time you hang on to your portfolio. So have a clear time frame and profit and stop loss targets in mind.
Aru Srivastava
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