Trading Is Timing

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Trading Is Timing

Trading is all about time. To properly comprehend this, consider that one of the largest increases in stock market history came on October 19, 1987, the day of its worst fall. Stocks had fallen 23% by the end of the day on that day, but at approximately 1:30 p.m., they launched a spectacular rebound that saw the Dow Jones and S&P 500 indices verticalize off the bottom, climbing more than 10% before running out of steam and dipping down to close the day on the lows.

While most traders lost money that day, individuals who bought the bottom at 1:30 p.m. and sold an hour later saw some of the biggest short-term returns in stock market history. Traders who shorted at 1:30 p.m. only to cover in a panic an hour later had the terrible distinction of losing money on their shorts on the day of the stock market’s worst collapse.

At the very least, the 1987 stock market fall demonstrated that trading is all about timing. Timing is difficult to perfect, but if you follow a few basic guidelines, you may still make large profits on an ill-timed deal.

The Advantage of Avoiding Margin

What happens to traders who are bad at timing? Can poor timers ever thrive, particularly in the currency market, where ultra-high leverage and stop-driven price movement often drives margin calls?

The answer is yes.

Some of the world’s top traders, such as market wizard Jim Rogers, are still thriving. Rogers and his famous gold short trade are certainly worth investigating further. When gold reached record highs in 1980 due to double-digit inflation and geopolitical upheaval, Rogers became persuaded that the yellow metal’s market was becoming frenzied. He understood that the surge in gold, like other parabolic markets, could not continue eternally.

Regrettably, Rogers was early to the deal, as is so frequently the case with him. He shorted gold at roughly $675 per ounce as it proceeded to soar beyond $800. Most traders would not have been able to endure such severe price movement in their position, but Rogers, an acute student of the markets, realized that history was on his side and managed to not only hang on, but also profit, finally covering the short around $400 per ounce.

What was the secret to Rogers’ success, other from his brilliant analytics and iron resolve? In his deal, he employed no leverage. By not using leverage, Rogers avoided putting himself at the mercy of the market, allowing him to liquidate his position whenever he wanted rather than when a margin call drove him out of the transaction. By not using leverage on his position, Rogers was able to not only remain in the trade, but also add to it at higher levels, resulting in a superior total blended price.

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Slow and Low Is the Way to Go

The gold Rogers trade teaches currency traders a lot. Experienced traders are used to getting stopped out or having their margin called on a position that was going their way. Trading is a challenging profession since time is difficult to perfect. Rogers supplied himself with a significantly bigger margin for error by utilizing little or no leverage, and hence did not need to be right to the penny in order to collect enormous profits.

Currency traders who are unable to time the market effectively would be wise to adopt his technique and deleverage themselves. Success in FX trading, like success in cookery, is predicated on the premise that “slow and low is the way to go.” Specifically, traders should take positions slowly, with modest amounts of cash, and with the least amount of leverage possible.

Consider two traders to properly explain this issue. Both traders begin with $10,000 in speculative money, believe the EUR/USD is overpriced, and plan to short it at 1.3000. Trader A uses 50:1 leverage, selling $500,000 in EUR/USD short against $10,000 in speculative account equity. Trader A has just 100 points of leeway on a regular 1% margin account before being margin called and thrown out of the market. If the EUR/USD rises above 1.3100, Trader A will suffer a significant loss.

Trader B, on the other hand, utilizes a significantly lower leverage of 5:1 and only sells $50,000 EUR/USD short at the 1.3000 level. When the pair rises to 1.3100, Trader B emerges relatively unharmed, with just a $500 floating loss. Furthermore, when the pair rises above 1.3300, they may increase their short position and obtain a better-blended price of 1.3100. If the pair then ultimately falls and trades back down to its initial entry level, Trader B is already profitable. Both dealers made the identical transaction. Both were utterly off on time, yet the outcomes could not have been more different.

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No Stops? Big Problem!

While Rogers’ slow and low method to trading is plainly effective, it has one major flaw: it does not utilize stops. While Rogers’ approach of buying value and selling frenzy has shown to be effective over the years, it is subject to a catastrophic event that may drive prices to unimaginable extremes and wipe out even the most cautious trading strategy. That is why currency traders should look at the strategies of another market expert, Gary Bielfeldt. In the 1980s, when interest rates reached historic highs of 14%, this plain-spoken Midwesterner earned a fortune dealing Treasury bonds.

Bielfeldt bought Treasury bond futures when interest rates reached such levels, assuming that such high rates were economically unsustainable and would not last. Bielfeldt, like Rogers, was not a terrific timer. He began his trade with bonds trading at 63, but they continued to decline, finally trading all the way down to 56. Bielfeldt, on the other hand, did not let his defeats spiral out of control. He just came to a halt whenever the situation shifted by half or one point against him. He was repeatedly stopped out as shackles slowly and painstakingly chiseled out a bottom. Despite losing money repeatedly, he never wavered in his analysis and proceeded to execute the same transaction. When bond prices eventually flipped, his strategy paid off as his longs skyrocketed in value, allowing him to profit well in excess of his accrued losses.

Bielfeldt’s trading strategy teaches currency traders a lot. Bielfeldt, like Rogers, is a successful trader who has had problems timing the market. Instead of mourning his losses, he would deliberately cut himself off. What set him apart was his unshakable trust in his research, which enabled him to join the same trade again and over again, when many less experienced traders would have quit and walked away from the profit possibility. Bielfeldt’s investigative method benefited him by enabling him to participate in the deal while minimising his losses. This powerful mix of dedication and perseverance is an excellent model for forex traders who want to win but are unable to correctly time their deals.

A Little Technical Help

While both Rogers and Bielfeldt employed fundamental research as the foundation for their trades, currency traders may also use technical indicators to assist them trade more efficiently. The relative strength index, or RSI, is one such instrument. The RSI analyzes the size of a currency pair’s recent gains against the size of its recent losses and converts that information into a figure between 0 and 100. A score of 70 or above is regarded overbought, while a value of 30 or less is considered oversold.

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A trader who has a strong view about the direction of a specific currency pair would be wise to wait until RSI readings verified their theory. In the chart below, for example, a trader who wished to short the EUR/USD on the basis that the pair was overpriced would have been far more accurate if they waited until the RSI readings dipped below 70, suggesting that much of the purchasing momentum had left the pair.

Image by Sabrina Jiang © Investopedia2021

The Bottom Line

Timing is essential for effective trading, but traders may still benefit even if they are terrible timers. The secret to success in the currency market is to take modest holdings with minimal leverage so that ill-timed transactions have plenty of opportunity to absorb any bad price movement.

To be sure, trading with no stops is never a good idea. That is why, even weak timers, should use a probative methodology that carefully maintains trading losses to a minimal while enabling the trader to re-establish the position on a continual basis.

Finally, even basic technical indicators like the RSI may improve trade entry and make fundamental tactics far more efficient. Some of the world’s finest traders have shown that one does not need to be a great timer to make money in the markets, but by using the tactics outlined above, one’s chances of success rise considerably.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Investing entails risk, including the possibility of losing money.

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