It has long been assumed that market timing and investing are mutually incompatible, although the two tactics work well together in providing consistent returns over time. The endeavor necessitates a shift away from the buy-and-hold approach that defines contemporary investing and the incorporation of technical ideas that aid in entrance timing, position management, and, if necessary, early profittaking.
Study Long-Term Cycles
Looking back, bull markets ended in the sixth year of the Reagan administration and the eighth year of both the Clinton and Bush administrations. Since 2009, the Obama/Trump bull market has been in full swing. These historical analogs and cycles might spell the difference between outperformance and missed opportunities. Interest rate swings, the nominal economic cycle, and currency changes are all examples of long-term market dynamics.
Watch the Calendar
Financial markets also follow yearly cycles, which favor various strategies at different periods of the year. Small caps, for example, have relative strength in the first quarter that tends to fade in the fourth quarter. Many people believe that this is the time of year when conjecture about the new year reignites interest. Meanwhile, tech companies typically outperform from January through early summer before fading until November or December.
Both cycles essentially follow the market adage “sell in May and go away,” a strategy based on stock underperformance in the six months beginning in May and ending in October against the November to April timeframe.
Ranges That Set up New Trends
In all holding periods, markets tend to move up or down approximately 25% of the time and become stuck in sideways trading ranges the other 75% of the time. A short examination of the monthly price pattern will reveal how the potential investment is aligning along this trend-range axis. These pricing dynamics are consistent with the classic market adage that “the larger the shift, the wider the base.”
To boost your chances of success, you’ll need to use a range of indicators and tools while entering and exiting trades in order to optimize your gains. TheTechnical Analysiscourse at theInvestopedia Academy is a wonderful place to start since it offers interactive information and real-world examples to help you improve your trading abilities.
Buy Near Support Levels
The worst thing an investor can do is get too emotional after an earnings release and use it as a stimulus to open a trade without first considering current price in relation to monthly support and resistance levels. When purchasing equities that has burst out to an all-time high or is coming from a deep base on tremendous volume, the most beneficial entrances occur.
The iShares Russell 2000 ETF (IWM) broke out of a two-year trading range in 2012 and gained 45 points in 16 months before relaxing into a new range that lasted another 16 months before delivering a new uptrend. Investors were optimistic in the higher half of the 2014 range and bearish in the lower half, with buying into the most negative sentiment at the bottom of the range being the most lucrative entrance.
Build Bottom-Fishing Skills
It is instructed to traders not to average down or grab falling knives. Nonetheless, investors gain from establishing holdings that have dropped hard and quickly but show signs of bottoming out. It’s a logical approach that generates preferred average entry and capitulation prices by purchasing tranches around the magic number as the instrument moves through a basing pattern. If the floor is broken, execute an exit strategy that involves selling the whole investment at or above the capitulation price.
After a strong climb, Apple Inc. (AAPL) shares reached a high of $100 before entering a sharp fall. Prospective investors may use a Fibonacci grid to find harmonic levels that might elicit considerable purchasing interest over a four-year trend. When the slide hits the 38.6 percent retracement at $66, the clearly highlighted retracements encourage buying the initial tranche of a new position.
The fall proceeded to the 50% level at $56, while monthly stochastics breached the oversold level for the first time since 2009, and the price settled on the 50-month exponential moving average (EMA), a traditional long-term support level. Investors have another four months to place themselves inside the developing base before a rally that reached an all-time high in 2014.
Identify Correlated Markets
The present market environment is defined by algorithmic cross-control across stocks, bonds, and currencies, with enormous rotating strategies in and out of connected sectors on a daily, weekly, and monthly basis. This puts the portfolio at risk since apparently unrelated investments may be in the same macro-basket and being purchased and sold at the same time. When a “black swan” event occurs, this strong correlation may ruin yearly returns.
Reduce this risk by allocating each stake to a comparable index or ETF and doing two studies at least once a month or quarter. To begin, examine the relative performance of the position and the connected market, seeking for strength that indicates a good investment. Second, examine associated markets, searching for relative strength in the categories you’ve decided to invest in. When both studies show to market leadership, you’re hitting all cylinders.
Hold Until It’s Time to Sell
Investors that take a passive strategy sit on their hands regardless of economic, political, or environmental events, relying on data that favor long-term profitability. What the figures don’t tell you is that they were calculated using indexes that may or may not be related to your exposure. Just ask stockholders who invested in the coal business when President Obama was in office. As a consequence, investors should determine a surrender price for each trade.
Even if you intended to keep your lucrative assets for life, you may need an exit strategy. Consider a multi-year position that eventually hits a record high spanning five to twenty years. These stratospheric price levels represent significant opposition that may flip a market and drive it down for years, so it makes sense to take the profit and reinvest it in a more promising long-term opportunity.
The Bottom Line
Market timing guidelines that use traditional technical analysis assist investments and other long-term positions by identifying the ideal prices and periods to take exposure in order to profit. Furthermore, by raising warning lights when underlying market circumstances change drastically, these timeless notions may be used to safeguard active assets.
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