Market Timing Definition Examples Top 2 Market Timing Strategies

What is Market Timing?

Suppose an investor, Mr. M, wants to invest in the market for two years. He has the following information: –

Stock A will gain 20% within ten months from nowStock B will lose 12% within six months from now

Based on the above information, Mr. M can make a strategy of buying Stock A before it gains and buying Stock B after it loses. However, the certainty and magnitude of Mr. M’s expected returns will depend upon the authenticity and productivity of the information.

Basis of Market Timing Strategy

Strategies related to market timings may be based on fundamental analysisFundamental AnalysisFundamental Analysis (FA) refers to the process of studying any security’s intrinsic value with the object of making profits while trading in it. The primary purpose of fundamental analysis is to determine whether the security or stock is undervalued or overvalued and thereby make an informed decision to buy, hold, or sell it in order to maximize the potential for gains.read more or technical analysis. Investors who do not perform any of these analyses also tend to make their predictions based on the information that comes out from these analyses. But, on the flip side of this is the perspective of some analysts who believe that markets are perfectly efficient because future prices cannot be determined.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Market Timing (wallstreetmojo.com)

#1 – Fundamental Analysis

When an analyst performs fundamental analysis on a stock or any security, he puts forward some assumptions that correlate to the timing of the buy or sell decisions about the stock. Market timing becomes the function of his assumed variables and thesis. The more accurate his assumptions, the more impeccable the timing of the trade. Generally, fundamental analysis forms a mid-term to long-term view of its stocks.

#2 – Technical Analysis

Technical analysisTechnical AnalysisTechnical analysis is the process of predicting the price movement of tradable instruments using historical trading charts and market data.read more is more short-sighted and takes a short to a mid-term view of its subject security. Market timing in such a case becomes the function of historical performance and investor behavior.

The exact opposite – Buy-and-Hold Strategy

When investors do not believe in the fruitfulness of market timing strategies, they tend to use a technique known as buy-and-hold. This strategy is based on that better market return is possible only in the long investment run. Therefore, it is closely associated with the passive management strategy of investing and opposite market timing strategies. However, one should note that a buy-and-hold investor will not always be passive in security selection. Instead, he will actively choose stocks when he finds them worthwhile but takes a long-term position by holding the stocks.

Advantages

When performed with good command of timing, market transactions generate high returns.High gains may offset the risks in such strategies.One can earn quick and short-term profits.

Disadvantages

It requires constant tracking of market behavior and trends.The strategy’s short-term horizon brings tax liabilities into the picture.Since profit earnings are quick and short in duration, investors might find it rather tricky to buy and sell at the most appropriate juncture.

Limitations

These strategies can be limited by the arguments laid by the following theories: –

Efficient Market HypothesisEfficient Market HypothesisThe efficient market hypothesis (EMH) states that the stock prices indicate all relevant information and are universally shared, making it impossible for investors to earn above-average returns consistently. Economist Eugene Fama gave the idea of the efficient market hypothesis in the 1960s.read more – Theorists who believe markets to be efficient consider market timing a less significant factor in trading, thus creating no opportunities for trade. This school of thought thinks stock prices to be at fair market value and hence makes no distinction between overvalued or undervalued stocks.Passive Management – Some investors do not consider investing time in regular market trading. They have long-run investment strategies and consider market timing to be less helpful in pursuing profits.Random-walk Theory – The proponents of the random walk theoryRandom Walk TheoryRandom walk theory states that the prices of stocks fluctuate independently of their counterparts and follow the same distribution. In other words, it suggests that predicting stock prices based on past trends is of no use since the securities often exhibit an irregular performance.read more think predicting the market and stock prices are useless. They feel information supporting fundamental analyses and technical analyses to be futile. According to them, historical prices cannot form the basis of future predictions, and neither can stocks affect each other.

Conclusion

Market timing is the strategy of trading financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more based on the rule of timely buying and selling. One can apply it to a long-term or short-term investing horizon depending upon the risk and return preferences of the investors. It can operate based on simple or complex forecasting methodsForecasting MethodsTop forecasting methods include qualitative forecasting (Delphi method, market survey, executive opinion, sales force composite) and quantitative forecasting (time series and associative models).read more. One can also use this strategy to either enter or exit financial markets or choose between assets or asset classesAsset ClassesAssets are classified into various classes based on their type, purpose, or the basis of return or markets. Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.read more.

It has always been at the center stage of traders and analysts. If we take an unbiased view of trading, we might agree that it is one of the more essential factors. An investment made at the right time comes to fruition more easily and requires a greater sense of timing, knowledge, and analysis.

A larger and all-encompassing view of market timing is difficult to take. It provides small yet consistent gains; for others, investing is the mantra in the long run. For some reason, markets have always offered ample ways to trade. Every perspective has its fair share of gains and losses. Hence, it becomes a matter of opinion and experience.

It can be considered good market timing if it has earned returns, making it dwell in suspicious waters. One can safely assume that an accomplished trade over the long run with such strategies is rather tricky, if not impossible.

What is Market Timing?#

Basis of Market Timing Strategy#

#1 – Fundamental Analysis#

#2 – Technical Analysis#

Advantages#

Disadvantages#

Limitations#

Conclusion#

Recommended Articles#