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Psych yourself out of the market's rut
Get ahead in this range-bound market
| | The Street.com
25 tips to improve your market timing
By Alan Farley 10/28/2004
Traders learn the hard way how easy it is to be right and still lose money. We spend hours searching for the perfect pattern, but we forget that timing is everything. In reality, each position negotiates a minefield of conflicting time elements in order to book profits.
Market timing bridges the gap between the setup and the trade. It's the door through which you take on monetary and emotional risk. So what's the best timing strategy for your next trade? Unfortunately, the right answer changes over time.
As a result, traders need to plan each position within the context of the current market environment, reward-to-risk ratio and chosen holding period. This extra effort is often a necessity, not a luxury.
Here are 25 tips to improve your market timing:
1. Buying a breakout or selling a breakdown is the only timing method employed by most traders. It's also the best way to wash out of the markets.
2. Never chase a selloff. The best short sales come at the end of weak rallies.
3. Pullbacks use the capital of those who missed the first move. The trick is to get into the trade before they do and let their emotions carry your position into a profit.
4. The best time to enter a position is just before a breakout or breakdown. Find these quiet opportunities in advance by looking for narrow range and volatility contraction.
5. It's more fun to swim with the fishes than be crushed by the waves. Most price movement needs support from the broader market.
6. The most profitable trades come when the crowd is leaning the wrong way.
7. Adjust your timing ahead of, behind or against the crowd to capitalize on its herd mentality.
8. Trading opportunities move quietly from one place to another, avoiding the crowd at all times. But the crowd keeps banging at the old door long after the resident leaves.
Strongest stocks, strongest sectors
9. A rising market floats all boats, even the leakiest ones. But in tough times it's best to play the strongest stocks in the strongest sectors. | Technical Analysis | The best market-timing strategy changes from trade to trade; here's some guidance.
In tough times it's best to play the strongest stocks in the strongest sectors.
Take a series of entries to get the best possible price. |
10. Determine whether you're in a range or a trend for the time frame you want to trade. Sideways markets take up 80% of all price bars. Getting it wrong can be expensive.
11. An opening gap from one price cluster to another robs a pattern's profitability if you're not positioned before it happens.
12. Many traders believe they're too late when they stumble across a breakout or breakdown in progress. In fact, they're often way too early.
13. Trend relativity errors wash out many traders. This happens when you throw money at a speedboat but fail to notice the ocean liner moving against your position.
14. Time absorbs price. The longer a pullback takes to reach support, the less elastic a bounce will be.
15. High volatility pulls hesitant players off the sidelines, and charting events that might otherwise take weeks to unfold can be over in a few vertical bars.
16. NYSE stocks can turn at narrow support or resistance, but Nasdaq stocks often charge past these levels to take out the stops before they reverse.
17. Look at the length between the highs and lows of individual bars. Those before the breakout or breakdown should be smaller than those after it.
Rewards and exit strategies
18. Seek the reward that matches your holding period. In other words, trade the most profitable move you can find within the time frame that you're long or short the stock.
19. Consider a time-based exit strategy. This means focusing your attention on the holding period's time window, rather than the price action.
20. Consider blind exits. Close positions without hesitation at predetermined targets. Exit the trade as soon as price hits the target, regardless of how good or bad it feels.
21. Chasing momentum works only when traders choose their plays wisely, pay close attention to risk and seek support from the broader market.
22. Skilled tape-reading enables traders to enter and exit positions before the price charts issue technical signals.
23. Take a series of entries to get the best possible price. Scalp small profits or losses before keeping the trade that offers the best opportunity for a longer-term position.
24. Use market orders to get in fast when you can watch the action. Place limit orders when you have a real life outside of the markets.
25. How can you take money out of the markets in the years ahead? Find new market inefficiencies early, and adapt your plan to the school of what works now.
Alan Farley is a professional trader and author of "The Master Swing Trader." Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to Alan.Farley@TheStreet.com. Click here to read our conflicts and disclosure policy.
© 2004 TheStreet.com, All Rights Reserved.
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