Sunday, July 1, 2007

Market Timing

I was reading The (MIS)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward and came across the following:

Market Timing Matters Greatly.
Big Gains and Losses Concentrate into Small Packages of Time.

"From 1986 to 2003, the dollar traced a long, bumpy descent against the Japanese yen. But nearly half that declined occurred on just ten out of those 4,695 trading days. Put another way, 46 percent of the damage to dollar investors happened on 0.21 percent of the days. Similar statistics apply in other markets. In the 1980s, fully 40 percent of the positive returns from the Standard & Poor's 500 index came during ten days - about 0.5 percent of the time... In the space of just two turbulent weeks in 1992, George Soros famously profited about $2 billion by betting against the British pound... Suppose big news has inflated a stock price by 40 percent in a week, more than twice its normal volatility. What are the odds that, anytime soon, yet another 40 percent run will occur? Not impossible, of course, but certainly not large. A prudent investor would do as the Wall Street pros: Take a profit."

This quote reaffirms my thoughts that market timing does indeed matter. One can make money several times over when trading a stock bounded by support and resistance levels instead of just once when buying and holding. All one needs to do is find such a situation and use it to your advantage. This, of course is easier said than done, but it will be definitely a pattern I will continue to keep an eye on and hopefully, take advantage of in the future.


FourPillars said...

Interesting post.

I can't argue with the basic stats regarding market timing - if you avoid the worst days you'll do much better and if you miss the best days you'll not do well at all. I feel that argument is specious because I don't believe you can time the market to avoid the worst days and to be invested for the best days.


White Eagle said...

Yup, you're right FourPillars. Market timing is definitely not easy. If it were, everyone would be rich! I think the authors were trying to show that good and bad news comes in bunches. When such opportunities arise, the benefits can be very rewarding. Trading styles depend on your time frame... if you're in it for the long term, it's better to ride out the bumps along the way, especially if you're invested in the index-based ETF. If you're in it for the short to medium term, it nevers hurts to take a profit, especially if you're holding a non-blue chip stock.