Market Timing Pro

Trading Fears... We All Have Them - Part II

Last week we looked at trading fears that can keep you from making the profits that experienced market timers consistently realize. Last week's Trading Fears Part 1 can be read by clicking here.

It is not the timing strategies that keep timers from being profitable, it is the fears, which we all have at one time or another, that keep us from making the trades. In Part 2 we look at more "fears" which must be overcome to be successful in the markets.

Fear of Letting a Profit Turn into a Loss

Unfortunately, most market timers (and traders) do the opposite of "let your profits run and cut your losses short." Instead, they take quick profits while letting losers get out of control.

Why would a timer do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.

How should you take profits? At FibTimer we trade trends. Once a trend begins, we stay with that trade until we have enough evidence that the trend has reversed. Only then do we exit the position. This could be days if the trend signal fails, or months if it is a successful trend.

Does this sometimes result in small losses? Yes. If we have a false signal to start with it can. But we must look at market history to understand this trading concept. History tells us that while there are times when the markets trade sideways or make failed moves, once a real trend begins, it usually lasts much longer than anyone expects it to.

That means for the few failed trends, the real ones last a very long time, and generate huge profits. But because no one knows ahead of time which signal is the start of the next big trend, we must trade them all.

What happens in the short term can be accepted because we are assured of profits in the long term as long as we stay with our timing strategy. We do not try to quickly lock in profits. We stay with the trend until the trend changes.

This way we obtain every bit of profit that the markets will give us. And... we do not have to worry about locking in gains. We let the markets themselves tell us when to do it.

Fear of Not Being Right

Too many market timers care too much about being proven right in their analysis on each trade, as opposed to looking at timing as a probability game in which they will be both right and wrong on individual trades.

In other words, by following the timing strategy we create positive results over time.

The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs.

Ego leads to equating the timer's net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.

Timing results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will not be able to stay with the timing strategy, but instead will allow your emotions to step into the timing process.

The ego's need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.

If you have a perfectionist mentality when trading you are really setting yourself up for failure because it is a given that you will experience losses along the way in timing as in any trading.

You can't be a perfectionist and expect to be a great market timer. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain.

The objective should be excellence in timing, not perfection. You should strive for excellence over a sustained period, as opposed to judging that each buy or sell signal must be perfect.

The great timers make losing trades, but they are able to keep the impact of those losses small. For the market timer who is dealing with excessive ego challenges, this is one of the strongest arguments for mechanical systems. With mechanical systems you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you execute your system's entry and exit signals.

Mechanical systems are all that we use at FibTimer. Years of trading experience has taught us that there is no way to keep emotions from affecting trading, except by following unemotional, non-discretionary strategies.

Conclusion

As a market timer, you must move from a fearful mind set to a mental state of confidence. You have to believe in your ability to execute every trade, regardless of the current market sentiment (which is often at odds with the trade).

Knowing that the timing strategy you are following will be profitable over time builds the confidence needed to take all of the trades. It also makes it easier to continue to execute new trades after a string of small losing ones.

Psychologically, this is the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their timing strategy.

And typically, when trader's pull the plug and exit their strategy, it is exactly at that time that the next profitable trend begins.

Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul.

As you focus on the execution of your timing strategy, while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, gain confidence in your timing strategy, and over time become a successful (profitable) market timer.

Trading Fears... We All Have Them. It's How We Handle Them That Counts.

All market timers, traders and investors, in every kind of market, feel fear at some level. Turn on the news one day and hear that a steep unexpected sell-off (ie: Dow 358 point selloff on Thursday) is taking place, and most of us will get a queasy feeling in our stomachs.

But the key to successful "profitable" market timing, in fact all trading, is in how we prepare ourselves to handle trading fears. How we prepare to deal with the risks inherent in trading.

Mark Douglas, an expert in trading psychology, says this about trading fears in his book "Trading in the Zone."

"Most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting in too high and too low and causing them to react emotionally, with excessive fear or greed after a series of losses or wins."

As the importance of an individual trade increases in the trader's mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.

All traders have fear, but winning market timers manage their fear while losing timers (as well as all traders) are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the "fight or flight" response. We can either prepare to do battle against the perceived threat, or we can flee from this danger.

When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to "freeze."

There are four major trading fears. We will discuss them here, as well as how to handle them. Fear Of Losing

The fear of losing when making a trade often has several consequences. Fear of loss tends to make a timer hesitant to execute his or her timing strategy. This can often lead to an inability to pull the trigger on new entries as well as on new exits.

As a market timer, you know that you need to be decisive in taking action when your strategy dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your timing strategy. This causes a lack of trust in the strategy or, more importantly, in your own ability to execute future signals.

For example, if you doubt you will actually be able to exit your position when your strategy tells you to get the out, then as a self-preservation mechanism you will also choose not to get into a new trade. Thus begins analysis paralysis, where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.

Looking deeper at why a timer cannot pull the trigger, a lack of confidence causes the timer to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain.

No one likes losses, but the reality is, of course, that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game both financially and psychologically. The longer you can remain in the trading game with a sound timing strategy, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.

When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process.

By following a strategy that unemotionally tells you when to enter and exit the market, you can avoid the pitfalls caused by fear.

This, of course, is what we do here at FibTimer. We learned long ago that unemotional (non-discretionary) timing strategies save us during emotional times in the market. We know the strategies work, so we put aside our fears, and make the trades.

And remember, you must be able to take a loss. Consider them as part of trading. If you cannot, you will not be around for the big gains because you will be on the sidelines guarding your capital against that potential loss.
Remember that good timing strategies are designed to guard against big losses. Every trade you take has the potential to become a loss, so get used to this reality and take every buy and sell signal. That way, when the next big trend starts, you will be onboard and profit from it.

Fear Of Missing Out

Every trend always has its doubters. As the trend progresses, skeptics will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend.

The fear of missing out can also be characterized as greed of a sorts, for an investor is not acting based on some desire to own the stock or mutual fund - other than the fact that it is going up without him on board.

This fear is often fueled during runaway booms like the technology and internet bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.

When you think about it, this is a very dangerous situation, as at this stage investors tend essentially to say, "Get me in at any price - I must participate in this hot trend!

The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a "promising" and "obviously beneficial" trend. But there's nothing obvious about it.

Remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality.

It is expectation gaps like this that often create serious risks for those who have piled into a trend late, well after it has been widely broadcast in the media to all investors.

Next week read part 2, the conclusion of this article on "Trading Fears."

Stock Market Bear Roars

June 27, 2008

The S&P 500 Index – SPX declined some 3% on Thursday, June 26 as the financial markets sold off across the board, not only in the U.S. but also around the world.

The S&P 500, hovering at a critical support level all this week, not only broke decisively below that support, but also declined almost to the January and March panic lows in just one day. A break below support typically forecasts a test of the lows, but in this case, the SPX is now already at those lows.

We peg the panic lows at about SPX 1270. The markets traded lower in March but only intra-day. This is dangerous territory for the markets. A close below the March lows would likely create an escalating downtrend on rising volume. It will last until panicked traders unload all their losing positions and that will occur only when fear controls the markets.

On the subject of fear, the CBOE Volatility Index – VIX, is nowhere near signaling a bottom. Traders do not seem particularly worried as of yet.

There is no sense forecasting how low the markets could go if support breaks here. Certainly the June 2006 lows at SPX 1219 could easily be reached in coming days and if we are in a bear market, that level would likely also be surpassed.

Suffice to say, cash is king right now and any trader still holding bullish positions has had many chances to exit. Only the greedy pay with big losses.

Following The Crowd... To Conform Or Not To Conform?

Humans have a natural tendency to follow the crowd, but when timing the markets, following the crowd can often result in losses.

Unless you are in the middle of a long term trend, it usually doesn't work to conform to the masses.

Expert market timers know how to spot trends and they make sure to climb on board and profit. But often, the very same buy and sell decisions, which must be executed to jump on board that trend, are in direct conflict with current market sentiment.

It is not easy to make that trade when it conflicts with what seemingly everyone else is doing.

Interestingly, your ability to break away from what the masses are doing, from current sentiment, may have a lot to do with your personality.

Following The Crowd

There is safety and comfort in numbers. In following the crowd. Across the generations, people learned that survival depended on banding together and working as a group.

All humans inherited this legacy, and it is shown in the security we feel when we follow the crowd.

The most successful members of society have seen the virtues in following the crowd. They have learned to look for rules to follow and to decide which standards to strive for. Blind obedience to authority may not be beneficial but compromise is.

To be successful, it was vital to protect one's self interests yet also stay within the bounds of acceptable behavior.

Although you've been frequently warned about the pitfalls of following the crowd, it's important to recognize that it is a survival instinct that is ingrained not only in humans, but in most animals too. Think of herds of deer, flocks of birds, swarms of insects, schools of fish. There is safety in numbers.

Going Our Own Way

Although following the crowd isn't bad all the time, such as during a long term rally, there are times when a market timer should not follow the crowd.

If all we had to do to be profitable was follow our instincts, we would likely be making the same buy and sell decisions as the vast majority of traders. But just as the vast majority of traders are NOT profitable... as market timers we want to "break away" from their emotional trading and BE profitable.

At Fibtimer, market timers trade market trends. Trends are created by the masses. Those same masses who are buying stocks at the top of a rally, and selling stocks at the bottom of a correction.

This means that most of the time, as market timers, we must go our own way. And right there is the crux of the problem.

As soon as our timing strategy, which is NOT based on the emotions of the masses, issues a buy or sell signal contrary to the current sentiment, our very human survival instincts kick in. We want to STAY with the crowd. It is hard to do what your instincts tell you not to do.

But those market timers who are successful, have learned to do just that.

Breaking Away From The Masses

We WANT to follow the masses. It is comforting.

But if we want to profit when the masses do not, we must learn to push down those same instincts which have made us successful in life, and refuse to allow them to control our buy and sell decisions.

It is true that the crowd is often right... until a turning point occurs. But when the markets turn, the crowd holds on, often until most if not all their gains have evaporated.

Going against the crowd takes a special kind of person, a person who isn't afraid of risk but doesn't seek it out, a person who looks inward only, and doesn't need reassurance from others.

FibTimer has spent years developing and fine tuning market timing strategies that are profitable. Look at the historical trading results of individual trading strategies. These results can be yours, but you must commit to trading the strategies for the months and years necessary to realize them.

Break away from the masses and you too can realize the profits that we have achieved over the years.

Support Holds for S&P 500 Index - SPX

June 20, 2008

The S&P 500 Index - SPX has held at support, at least for now. The SPX declined to the 50% retracement of the March to May rally at 1341.22, and though this has not been a week to write home about so far that level has held.

Just below this level is critical support at SPX 1321.49. If the 2008 rally is to stay intact, it needs to reverse at these levels. A break below critical support would point to a decline to test the March panic lows. That would feel like panic time indeed should it occur.

There are bullish indicators though, one of them being the Nasdaq 100 Index - NDX that reversed to the upside on June 13, and so far has seen steady gains. Thursday’s weak advance in the SPX was far exceeded by the NDX gain of almost 1.5%. Strength in the tech stocks is bullish for the entire stock market, even though the economic news and energy prices have everyone spooked.

Markets Go Up, Markets Go Down

Markets go up, markets go down.

It shouldn't matter much, but many new market timers find that their own personal mood fluctuates with the markets, moving from extreme euphoria as the markets soar to new heights to deep despair when the markets plunge to abysmal lows.

Why do market trends have such power over emotions?

They don't need to, but many new market timers have difficulty cultivating an objective mind set.

Following The Masses

By allowing fear and greed to influence their trading decisions, new timers tend to follow the masses, and when they go with the crowd, they soon find that market trends not only influence their moods but their account balance as well.

There's a strong tendency to follow the crowd. There is a feeling of safety in numbers. When you see a steady upward trend, you feel secure. Everyone is buying.

They are all doing the same thing. When other people offer confirmation of your decisions, you feel safe and assured.

In a bull market, it isn't so bad to follow the crowd. When it's a strong bull market, the crowd is often right, and it makes sense to follow them. However, when the market turns around, feelings of safety and security can turn instantly into fear and panic.

Humans Tend To Be Risk Averse

Why? An obvious reason is that many new market timers don't have the ability or financial resources to sell short, and take advantage of a bear market.

But there's a psychological issue as well. It is difficult to know how to handle falling stock prices. For example, humans tend to be risk averse.

When one is in a bullish position and the markets suddenly turn, it's hard to accept losses, and even harder to execute that sell signal, issued by your timing strategy, before more damage is done.

Denial and avoidance set in. At that point, a market timer with a losing position panics, hopes that things will turn around, and waits for events that are unlikely to happen.

Usually the price continues to fall, heavy losses are incurred, and as expected, disappointment and despair set in.

Detached And Relaxed

It's vital for your survival as a market timer to stay calm and objective. Don't let your emotions interfere with your decision-making.

How do you stay detached and relaxed?

First, following a non-discretionary timing strategy and knowing, absolutely, that over time it will be profitable, helps you to rise above strong emotions and allow the strategy to make the decisions.

Second, accepting the fact that you'll likely see many small losses as a market timer and that you should expect to see the markets turn against you. What is important is NOT to react like the rest of the crowd. Staying above the fray is the key to profitability and knowing that the money management rules built into your strategy will keep losses small and allow profitable positions to run as high as possible.

Third, think of the big picture; the long-term profits across a series of trades are all that matters, not the result of a single trade.

Develop A Logical Mind set

Don't allow your moods to fluctuate with the ups and downs of the markets.

By trading in a disciplined, methodical manner, you can cultivate an objective, logical mind set that isn't overly influenced by market moods.

Armed with the right mind set, a disciplined trading approach, and a tested market timing strategy, you will be able to realize the huge profits of winning market timers.

S&P 500 Index - SPX at Critical Support

June 13, 2008

In only a single week, the S&P 500 Index – SPX went from what looked like the start of a rally to test the prior highs, to a decline that is now testing critical support.

On Wednesday, June 11, the SPX closed below 1341, the 50% retracement of the entire March through May rally. Just below this level is the critical Fib 61.8% retracement support level at SPX 1321.

Should the SPX close decisively below 1321, we will be looking for considerably lower lows, possibly a retest of the March lows.

Should we have a bullish reversal day here or at SPX 1321, we could very well have seen the bottom of this correction.

When Your Money Is On The Line... Market Timing And Emotions

The winning market timer is cold, calculating, and unemotional.

Sound a bit unreal? Maybe it is, but the reality is that it is important to control your emotions, rather than let them interfere with your trading decisions.

We have written many, many times about fear and greed and how they are the true motives behind market behavior. Fear and greed may control the masses, but if they are allowed to control you, you become one of the millions who can't understand why they cannot make a profit when, supposedly, everyone else is.

There are also other emotions, such as anger and disappointment, that can influence your decisions. Emotions may interfere with discipline and sound decision-making.

But, they are not "all-powerful". You CAN master and control them.

Fight Or Flight

It is reasonable to be fearful when your money is on the line.

That is why winning market timers protect themselves by trading with a detailed market timing strategy. Timing strategies are NOT affected by the emotions of the masses, and they are also designed to manage risk.

When you KNOW your strategy works over time and also is designed to minimize risk, you can execute the buy and sell signals effortlessly and with less fear. You do not fret over the inevitable losing trade.

Instead you are excited about the next trade. You KNOW that next big winning trend is coming. Whether it begins tomorrow or in several months you trade with the knowledge that when it begins, "you" will be one of the winners who capitalize on it!

This is why trading with a specific timing strategy is critical. The moment you deviate from the strategy, you become one of the masses. But if you stay with the plan, you USE those same masses to your advantage.

Anger And Disappointment

Anger and disappointment are two additional emotions that powerfully influence trading decisions.

Both emotions concern expectations about our market timing performance and how we expect the market to behave.

We become angry when things don't go our way. Because we want to win, we hope that the market will behave in a manner consistent with our timing strategy.

When we feel that fate, or some unidentified external forces (i.e. news events) have created a situation that thwarts our plans, we become angry.

When we think we ruined our own plans because of our incompetence, we feel disappointed.

Regardless, there's a natural inclination to want to control our destiny, and when it comes to market timing, we want to control the market.

We may want to impose our will onto the market.

The market, however, can not be controlled. One must accept what the market has to offer. You cannot make the market do what you want it to do.

Acceptance Is Key

If you accept that you are powerless over market action, you will be less angry or disappointed. If you anticipate and truly accept the fact that the market can, and often will, go against your timing strategy, and that it isn't personal, you will not be fazed by it when it happens.

You will just accept it, and move on.

If, on the other hand, you expect the market to move in your favor, you will feel angry and disappointed, which often leads to feelings of revenge or despair.

These emotions can be paralyzing. It is better to accept the market for what it is. Accept the results you achieve, good or bad, and just move on to the next trade. A good timing strategy is not profitable on every trade. No strategy is.

But if you quit because you are angry or disappointed, think how you will feel when the next trade is the start of the next big and profitable trend!

Emotions are a natural part of trading. The markets don't always meet our expectations. If you accept this fact, you will be able to minimize the influence of emotions.

You will then follow your timing strategy and over time, will achieve the results you desire.

Those Who Leave Never Achieve

Those who leave never achieve. All they do is chase the promises of supposed market experts who will take their money, but seldom ("never" is a more accurate word) give them the profitable results they desire. There are hundreds of them out there making promises so ridiculous we are embarrassed to even print them.

FibTimer does not post inflated timing results like so many of our competitors do. We have years of trading behind us as well as years of posted trading history. All subscribers have full access to all trades and years of trading history.

Stick with the plan and you will succeed.

Stock Market Breakout

June 6, 2008

The S&P 500 Index – SPX erased two weeks of losses on May 22 with a powerful rally adding almost 2% to this big cap index. We wrote three weeks ago that the rally was very much intact, and the current round of profit-taking was only to be expected after the sharp gains to date.

Even more important is the strength in the Nasdaq 100 Index – NDX which actually reached, and closed at, new rally highs.

Watch for a close above 1416 for the SPX which is an important resistance level. Just above 1416 is the 200-day moving average as well as the prior rally highs. If the SPX surpasses those levels in coming days, the target for this rally will be SPX 1454.

The NDX, at new rally highs, has a target of 2140, the prior December 2007 highs. Quite an accomplishment if we get there.

S&P 500 (SPX) & Nasdaq 100 (NDX) Timing

S&P 500 Index (SPX) Chart Analysis
Last week we wrote:

"...The S&P 500 Index - SPX suffered through a week of profit-taking that at times included bouts of extreme selling. Back-to-back 200 point Dow losses on Tuesday and Wednesday added to the unease."

This week:

Though this week was strong one for the stock market, the strength was not equally divided. The S&P 500 Index - SPX had gains but those gains lagged the Nasdaq indexes considerably.

With only a single week of disparity, there is not much that can be inferred from this. Just that the SPX did not perform as well and may make up the distance next week or in coming weeks.

But one thing is certain. the Nasdaq indexes are and have been outperforming the rest of the stock market for the last two months. Tech stocks are back in vogue and this bodes well for a continuation of this advance. Typically the Nasdaq leads the way in advances that last for a substantial time.

The SPX has not made it back to its 200-day moving average much less crossed above it. It was the 200-day moving average that started the selling two weeks ago so this is the target for the advance. The SPX needs to reach, and close above, this closely watched average, currently at about SPX 1420.

Initial resistance remains at the 50% retracement level at SPX 1416. If this level and the 200-day moving average are surpassed, the new target will be SPX 1454 which is critical resistance for the advance.

There was good news on the oil front as crude backed down from its highs. Oil has been in bubble mode for months now and some retracement is past due. Of course there is no way to know when the bubble will burst, nor how far down oil prices can drop when it bursts. But still, when it happens, look for higher stock market prices as a result.

The CBOE Volatility Index - VIX has moved to lows that indicate we may see a new lower base forming in this index. Potentially in the 12-13 level. If this happens the stock market will be considerably higher as a result.

The 50-day moving average continues to rise while the 200-day moving average is again the target for this advance.

Conclusion:

The stock market was hit by a round of profit-taking last week, but it occurred at expected resistance levels. When selling occurs right where you expect it to, the advance is likely just enduring one of many corrections it will face along the way.

This week the SPX regained half of the prior week's losses, but the Nasdaq indexes regained all of its losses. Strength remains with the tech stocks, as it has for the last two months.

The charts are still bullish for all the major indexes.

For subscribers who overly worry about short term swings in the financial markets, remember that you do not have to be an aggressive timer to be a profitable timer. Money is made in both aggressive and conservative style trading. Our Conservative S&P Timer strategy trades only the long term trends but that means it profits without the numerous buy and sell signals that active and aggressive traders take.

The SPX portion of this strategy is in a BULLISH position. We are in the Rydex Nova Fund - RYNVX (or other bullish S&P 500 index fund) for both active & aggressive traders.

S&P 500 Index (SPX) Daily Chart

Nasdaq 100 Index (NDX) Chart Analysis

Last week we wrote:

"...Until this week, the Nasdaq 100 Index - NDX had advanced almost non-stop for five weeks. That pace could not be sustained and the selling this week was the result. In fact, had the rally continued another couple of weeks, the selling would have been worse."

This week:

All of the Nasdaq indexes had powerful rallies this week. The Nasdaq 100 Index - NDX is now at new closing rally highs, and even the small caps rallied and reached new highs this week.

The NDX is one of the strongest indexes in this advance. Unlike the SPX which failed at the 200-day moving average, the NDX has been above this level for two weeks and stopped right at its 200-day average during the correction last week.

When support holds it is bullish. That support for the 200-day moving average was also right at the 50% retracement support for the NDX (see below chart).

Nasdaq volume also rose along with prices. After a week of strong selling, it is bullish when volume surges along with prices, especially so soon after the selling.

Importantly, the NDX not only reached the Fib 61.8% retracement level this week, but also closed above it. This forecasts higher highs for the NDX in coming weeks, and potentially a run for the Wave B highs at NDX 2140 over the next several weeks.

The NDX remains substantially above its support levels that are down at NDX 1853 to NDX 1810.

The NDX portion of this strategy is in a BULLISH position. We are in the Rydex Nasdaq 100 Fund - RYOCX (or other bullish Nasdaq 100 index fund) for both active & aggressive traders.

Nasdaq 100 Index (NDX) Daily Chart