How to Time the Stock Market

Learning how to time the stock market is shrouded in debate. “Impossible” some say… and take every opportunity to discourage you from even trying. “Just give up” others implore… throw it in an index fund. Well, I suppose if you don’t have the interest in learning or inclination to openly consider some of the possibilities, then that may be the way to go. Yet, even with an index fund, timing can make a significant difference in returns.

Take the S&P 500 for example… in October 2007, it was around 1500. By March 2009, it was below 700. That’s approximately 50% of a loss… extreme! In fact, I think it’s absolutely idiotic to suggest there are not better times to buy and sell than other times. But, how do you learn to time the stock market to make the most of the upside without getting caught by the downside risks? Let’s take a look together!

Perfectionists Need Not Apply

You’re going to be wrong. It’s a basic, yet often ignored, principle of successful investors. I’ve yet to meet the perfect investor, the perfect system, or the perfect stock that always leads to faultless profits. But there is a difference between being perfect and knowing the right moment to buy or sell. Successful investors follow a few simply principles:

  • Protect Capital – Making money is our aim… so losing money is the enemy. Therefore, successful investors know the right time to sell a position is before they lose money, or more money than they’ve already loss.
  • Minimize Risk – The most risky time to hold a stock is in the first few days of owning it. However, if you buy the rise, as the stock price is climbing, the risk is minimized by the sheer momentum of the stock. Once it is up a couple of percent, it is easy to protect your capital by placing your stop loss at or slightly above your purchase price, minimizing the risk of the trade.
  • Maximize Returns – Early on in my investment journey, I’d sell stocks when they rose 5% or more… unfortunately, in some cases, I’d watch it climb 20% or higher… frustrated I had sold it. Premature selling is emotionally driven trading and it will limit your returns rather than maximize them.
  • Put Profits in your Pockets – There are times when you need to put the profits in your pockets. One such example is when the fundamentals of a company change. If revenue is dropping and they are forecasting some troubles in the coming quarter, wise investor will take their profits rather than give them back.

Following these simple principles will help any investor successfully time the market. Do you apply principles to discipline your timing for purchasing and selling stocks? Join me in a couple of days when we’ll look at some specific examples of how timing the market can make a tremendous difference between being one of the 70% of investor who lose money or one of the leaders who making money trading stocks.

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