Market Timing

by Chetan Parikh

In a classic “Wall Street on Sale”, the author, Timothy P. Vick, writes about buy and hold v/s market timing.

1) “Define first how long you are willing to stay invested in the market. Your holding period will determine whether it makes more sense to hold or trade. The longer your presumed holding period, the more sense a buy-and-hold strategy makes.
2) The expected volatility of the market over that time period must be pronounced enough to give you a chance at beating a buy-and-hold strategy. Otherwise, it is best to hold.
3) The more volatile the market is, the more “winning points” are created. Thus, the more chances exist to make a profit and to beat the buy-and-hold returns. When volatility is low, the opportunities to successfully time the market dry up. In these environments, it’s best to keep your money invested.
4) The less volatile the market or stock, the more losing trades you will have. Your timing model will be generating too many buy and sell signals that are close together. You’ll also pay commissions on each trade.
5) In order to trade a stock successfully, it has to be able to generate many more winning points than losing ones. A ratio of at least 2: 1 is preferred. The general trend must be upward and expected to stay that way.
6) Your chances of beating a buy-and-hold position will depend mainly on how close to the peaks and troughs you trade. Mistiming mar­ket extremes by just a few percentage points can wipe out most of the advantages of timing.
7) No technical indicator has ever been devised to predict the exact peaks and troughs of a stock or market. And none ever will. The factors that cause the market to gyrate change constantly and are too numerous to quantify successfully. Even if these factors could be quantified, most individual investors lack the resources and access to enough information to create such models.”
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