Strategy Intermediate: Market Timing

Introduction to Market Timing What Is Market Timing? Timing the Market Timing Individual Securities in the Market Timing Mutual Funds in the Market Market Timing vs Buy and Hold Summary of Market Timing
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Timing the Market

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Timing the Market

Market timers look at indicators to determine when to buy or sell their shares. Indicators are data points determined by mathematical formulas. When an indicator points to a good time to buy a stock, it is called a buy signal. When an indicator points to a good time to sell a stock, it is called a sell signal.

Things To Know

  • Market timers use various indicators to time the market.
  • Indicators are determined by mathematical formulas.

Indicators used: market averages and moving averages

There are many types of indicators used by market timers. To look at the changes in a market over time, a market average is used. A moving average is an average of data (e.g., closing prices) covering a period of time (e.g., 90 days) going back from the date of calculation and periodically (e.g., weekly) recalculated. (Other time periods may be selected for the calculations.) When a price moves above or below a certain market average, the investor knows when to buy or sell.

Indicators used: market volume

Market volume indicators look to see whether stocks gaining or dropping in price are getting the biggest share of market activity (volume). Volume is the total number of traded shares. Periods of low volume indicate investor indecision. High volumes usually indicate new trends and higher share prices.

Indicators used: investor feelings

Market timers also look at investor sentiment. The more investors are optimistic and ready to buy, the more the market is likely to fall and vice versa.

Indicators used: resistance level and support level

When looking at a stock’s price history chart, you will notice that after the price of a stock reaches a certain level, it usually goes down (the resistance level), and when it reaches a certain floor (its support level), it will climb back up. To make the most profits, you want to buy as close to the support level as possible and sell near the stock’s resistance level.

When buy and sell indicators occur near each other, the phenomenon is called a whipsaw. A whipsaw indicates that investors are reversing themselves. This can make it difficult for investors to time their trades accurately, with potentially costly results.