Sunday, August 26, 2007

Aiming For The Moon

We have all seen the various headlines, ads and marketing hype.

"Use Japanese Candlesticks to spot reversals!" "Learn the secrets of the Pros." "Learn when to take profits." "Learn how to forecast reversals before they occur!"

The problem is that you cannot spot reversals or changes in trends until "after" they have occurred. No one can, although many profess to be able to do so.

Those who profess to have the ability to call reversals and changes in trends "ahead of time," also expect you to believe they have the ability to "predict" the future.

After well over 20 years of market timing experience, please take our word for this... No one can predict, with any certainty or consistency, what the market is going to do. Of course with so many analysts making predictions on a daily basis, someone will get a prediction right. But doing it consistently is something else again.

No one can predict, with any consistency, the future.

All we can predict with any certainty is... the markets will constantly change.

So if there is no way to predict what the markets are going to do, how do we time the markets?

By trading the long term trends that are inherent in free markets and always will be. Based on hundreds of years of history, markets will usually be in an up trend or in a down trend for sustained periods of time. Look at any long term chart and it will be obvious.

That is a fact. And from that fact a winning strategy can be created.

The Question Of Time Frame

How do we establish a trend has started?

Simply put, all we can depend on in the stock market is price. Price will change either up or down. Change is constant. If price moves higher for a sustained period of time, we are in an up trend. If price moves lower for a sustained period of time, we are in a downtrend.

The question of time frame quickly enters here as mutual fund timers cannot, by definition, be day traders. So a change in price to the upside, lasting several hours, while it may be an up trend to a very short term oriented trader, is useless for a fund timer.

The time frame for fund timers is in weeks and months, with an emphasis on "months." There is no way around it. If a fund timer trades more frequently, he or she will face a much larger percentage of losing trades because the markets change so quickly from day to day that short term trends are much harder to trade.

But remember what we said previously... history shows that trends do occur in the markets that last months and even years. In fact, the stock market is trending in measurable long term trends about 80% of the time.

Think 2000 through 2002, an obvious downtrend. Think March through December of 2003 when the market rallied non-stop. Long term trends that are easy to see on historical charts. They can also be traded with a high degree of profitability, over time, by using trend trading strategies.

As Trend Traders We Aim For The Moon

Trend traders, as we at Fibtimer are, do not try to catch exact tops. Nor do we try to catch exact bottoms.

We do not believe that anyone can.

Of course with hundreds of different opinions available at any time, someone will always be lucky and call an exact bottom or top. The financial news media is quick to go with the hype.

But try and do it over and over and over.

So how do trend traders know when a trend and begun?

The answer is... "after" it has started. Using prices, which are the only measurement of the markets that can "always" be depended upon, we can create rules that define when we are in a trend.

We could say that if the market rises a specific percent from a low, that we are in an up trend. At that point, we can take a long, bullish position.

But when do we exit? Do we exit after we have a 10% return? Or maybe set a goal of 20% and cross our fingers?

No... as trend timers we aim for the moon. If a trend goes 200% we want to be on board it from our entry point, right to the 200% point. We want it all.

But, then how do we know when to exit? The answer is simple...

Going For The Home Run

We exit "after" the trend has ended, and not until then. That means we stay until "after" the trend reverses.

When we start the trade, we go in looking for a home run. The sky is the limit.

We do not exit the trade until the market reverses and "prices" have moved far enough in the "opposite" direction to tell us a "new" trend has likely started.

That means we usually don't get in or out at any exact bottom. It also means we usually don't get in or out at any top. It means that sometimes we take small losses when our requirement is met for a new trend, but the trend fails (and they do... remember the 20% of the time when the markets are NOT in a trend).

But most importantly, it means we never miss any substantial trends, and we ride every trend as far as it will take us! All identified trends are traded. All of them.

This is where market timers make their big profits. They do go through occasional boring sideways markets, but when the market does trend, they are "always" on board for the majority of that trend.

By always going for the home run, trend traders, like baseball players, may have lots of strike outs (small losses). But those strike outs are obliterated by the home runs which we ride for all they are worth.

In the aggressive strategies, we make money in both up trends and down trends. These are the strategies that score big during bear markets.

And importantly in all our timing strategies, we cut our losses when a trend does not follow through.

Great fortunes are made trading trends. It takes a strategy. It takes discipline because you must stick to the strategy in all market conditions knowing that no one knows when the next trend will start.

But by trading trends, you know that over time you will beat the markets and be hugely profitable.