Market timing – What is it, definition and concept

Market timing is a stock market strategy based on entering and exiting the market with the aim of obtaining benefits through the prediction of the movement of the price of an asset.

That is, market timing consists of trying to buy as low as possible and sell as high as possible, under the assumption of knowing how to predict the optimal moment to do so.

This strategy is contrary to buying to maintain and generate long-term returns, regardless of volatility, and can be complemented by both technical analysis indicators and fundamental analysis.

Explanation

In other words, market timing consists of maximizing the profit of a trade by trying to guess what is going to happen next with the price of an asset. Investors who believe in this strategy constantly analyze various technical, economic and quantitative indicators to anticipate the market and forecast the best time to buy or sell. For example, buying at the worst time of a crisis and selling at the best time of the cycle.

Market timing is a strategy focused on short-term investment, which can last from seconds or minutes to months. This contrasts with the buy & hold or buy and hold strategy, which consists of long-term investment, regardless of market fluctuations and volatility and based on fundamental analysis.

Market timing is often used by managers who follow an active management style. However, very few investors have been able to predict the market movement that would lead them to access greater benefits compared to those who invest in the long term.

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Indicators

Market timing makes use of the study of certain indicators when it comes to achieving its purpose:

  • Technical indicators: For example, the moving averages, amplitude indicators, the MACD indicator and the RSI indicator.
  • Market sentiment indicators: Its aim is to capture the general feeling of investors, largely influenced by daily news that can instill fear, euphoria, uncertainty, etc.
  • Fundamental indicators: The interest rate curve, analyzing the variations experienced by the profitability of the different investment categories according to their maturity, and the economic cycles, taking into account the macroeconomy.

Criticisms and benefits of market timing

Although many investors practice it, this strategy is not without its critics. Many argue that it is related to gambling and therefore carries a high risk. It is related to the emotions and behavior of the investor. Furthermore, the statistical advantage it offers is not necessarily significant.

Generating profitability in a sustained way over time using only this strategy is very complicated. Hence, losing money is relatively easy.

Finally, it must also be assumed that a greater number of transactions to enter and exit the market entail higher commissions, which reduce the final profitability of the investment.

Proponents of market timing, on the other hand, argue that this strategy allows them to earn higher profits in the short term, because they are able to follow market sentiment. This guides to a certain extent to know when they have to buy, because it is the lowest moment, and when they have to sell, because it is the highest moment.

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