Psychology What Happens When You Try to Time the Market?

Many investors, professional and otherwise, believe that market moves can be predicted and that making frequent moves in and out of markets and investments will lead to greater returns. However, the data tells a different story, which is that market timing and frequent trading are harmful to your portfolio and will significantly reduce your overall return. Let’s begin by examining market timing.

The data below comes from research done by Terrance Odean, Ph.D., of Cal Berkeley, entitled, “Do Investors Trade Too Much?” Dr Odean discovered that amateur investors performed poorly after they made a trade (Either a buy or a sell, both speculative and non-speculative.) Thus, the stocks they sold did much better than the stocks they bought.

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When isolating for just the speculative trades, the returns are even worse.

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But maybe this underperformance only affects individual stock investors. Let’s take a look at research from Stanford’s Jason Hsu, Ph.D., on how the mutual fund investors fared. As you can see below, the returns of investors who purchased a mutual fund and held it are much better than those who bought and sold, and this holds true for every single category.

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Taking things a step further, Dr. Hsu actually quantifies just how much trying to time the market is costing investors. On average, mutual fund investors are destroying 2% of their returns each year by trying to move in and out of funds and mutual fund categories.

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But it doesn’t stop there. What if we want to destroy even more value? All we have to do is trade more frequently. There is a direct correlation between number of trades placed and performance. The more you trade, the more likely it is that you will perform poorly.

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Tying everything together, a Dalbar study shows that the average return for an investor is significantly lower than the return of an index. In the study, one that has been replicated many times, investors who were primarily investing in the S&P 500 index, or stocks that made it up, underperformed it by an extremely wide margin. This kind of study can be replicated with any index, in any asset class.

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The underlying reason for this is behavioral psychology. According to Dr Odean, “Psychologists show that most people generally are overconfident about their abilities and about the precision of their knowledge. Security selection can be a difficult task, and it is precisely in such difficult tasks that people exhibit the greatest overconfidence. Dale Griffin and Amos Tversky write that when predictability is very low, as in securities markets, experts may even be more prone to overconfidence than novices."

In Summary
Investors as a whole are overconfident in their skills, regardless of their backgrounds, which leads them to “try to do something.” Thus, market timing and frequent trading continue to persist, despite the overwhelming evidence of the foolishness of such strategies and the hefty reduction in return that will inevitably result.

James D. Di Virgilio can be contacted at Chacon Diaz & Di Virgilio Wealth Management
 
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Anyone that enters the markets becomes a trader.

the question is how long you want to hold?

5mins. 5 months. 5 years.
 
Interesting research, and I found some more interesting material from Berkeley online which supports Odean's conclusions.

I recognise some traits from my early days as a shareholder, before I committed to TA and spreadbetting. Needless to say, I don't invest that way any longer.

The same results apply to short term trading , hence most of these timing failures end up as vendors , but these vendors are really succesful at one thing .


https://www.google.co.uk/webhp?sour...espv=2&ie=UTF-8#q=success+rate+of+day+traders

Day Trading Success Rate…only 4.5%?Failure rate?
 
The way people are taught to trade in zero sum game , will eventually lead to losses and ruin.See how market timing does not work on chart below.

Look at chart :zero sum results , it leads to negative sum after handicaps of mental edge , trading edge , spreads and mistakes.
 

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The way people are taught to trade in zero sum game , will eventually lead to losses and ruin.See how market timing does not work on chart below.

Look at chart :zero sum results , it leads to negative sum after handicaps of mental edge , trading edge , spreads and mistakes.


the chart is hard to see what you are saying...too much pink? ;) pls explain
 
the chart is hard to see what you are saying...too much pink? ;) pls explain

The market calls the first shot ,price moves in a direction , you follow the price and enter a trade.At this point price breaks down , remains there or continues in your direction.Move may be end soon or be last leg of move .

In all cases you hace a 33% chance of trend continuation.The image shows , 80% ofthe time you enter a move it chops , the price stalls.It is called getting chopped out.


Markets trend about 20% of the time and spend the other 80% grinding through trading ranges, pullbacks and other counter trend action that tests boundaries.
 
The vendors are arguing , that market timing works , Warren buffet does not time the markets , he does better without it.

This is classic example of market timing not working.

Dax trade above , if I lose I lose 62 points on dax trade call option 12100

If price falls this week either I may add at lower prices or repeat this trade at lower prices

Last week this trade closed at loss of 62 ticks option expired at 0 , price below 12100, but if you see image , the price opened this week at 12250.

This proves that " market timing does not work"
 

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http://www.trade2win.com/boards/indices/222250-dow-thread-traders-dow-8.html#post2898384

Timing the entry is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to catch the optimum trend breakout. The entry may be based on technical or fundamental analysis.

Here I been sitting on this trade for hours , hardly any move .Sometimes it wiill do nothing for days , it may breakdown and move later without me.

http://www.trade2win.com/boards/trading-journals/223330-hindsight-dax-lulz.html#post2898020

Market timing is ineffective for short term traders including day traders , price action trading and other short term gambling like options.
 
https://www.google.co.uk/search?q=I...d=chrome&ie=UTF-8#q=is+market+timing+possible

Market timing example for live trades , called in advance .Here a loss is suffered because market timing does not work!

http://www.trade2win.com/boards/general-trading-chat/223162-im-doing-forex-again-19.html#post2899272

Short eur usd at 82 stop 100 points

close -50 loss , because i made a mistake , ecb press conference was missed on radar

Here I sell at 82 , but price ends up higher , then it later goes lower!
 

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You can time the markets , if you know what is going to happen next , but this causes mindset /mess in psyche issues.

In conclusion Mark Douglas, one of the greatest trading educators and authors of our time , taught us the opposite of market timing .His 10 rules contradict with the trading for market timing .

1. Be rigid with rules, flexible with targets.

2. Focus on opportunities that provide an edge.

3. Trade free of expectations of being right or wrong.

4. Synchronise your mind to the truth of the market.

5. Beleive in uncertanity (The market can do anything)

6. Be flexible so as to perceive with the greatest degree of clarity and objectivity of what the market is offering from its perspective.

7. Be careful what you project into the future because nothing has got the potential to create more misery and unhappiness than unfulfilled expectations.

8. To make money, trade without fear but also overconfidence.

9. The degree to which you think you know, or assume you know or need to know what is going to happen next, equals to the degree you will fail as a trader.

10. What you perceive in the market is limited to what you know less that what is blocked by fear.
 
Your first sentence in your previous post referred to "Odean", the second referred to "this individual", so it was not clear whom "this individual was". I think you're jumping to a lot of conclusions...which is making me consider jumping to the conclusion that your conflict of interest as a vendor is influencing your judgement.

true!

The vendors who sell these holy grails , are depedent on making others believe that market timing is easy.Their own success depends on the illusion of market timing!.

Vendor: Believe in yourself and what you’re doing to help your customers.

Why should anyone buy anything from anybody if the person from whom they are buying doesn’t even believe in it? There’s a reason why confident salespeople are more successful.
 
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Most DAY-TRADERS can not time the markets.

Swing traders can time the markets , if they wait for price to come to their levels , it may temporarily go past their level , than after a wait for a few days , weeks or months , the price goes in their intended direction.

This is how traders cansuccessfully time the markets .So maybe , with your good grammar and english , you can write an article on succesfully timing the markets.
 

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I don't write articles. I like to share what I do and how I do it so that others might learn and so that my approach benefits from criticism and suggestions.

Maybe a whole article is unnecessary if developing traders follow the simple principles -
1. do not day-trade
2. in an uptrend be long, in a downtrend be short, if there's no trend be in cash
3. set stops to get you out when the market takes the less probable direction

The detail of how to do these things isn't terribly important or interesting.
 
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