Market Timing

Market timing is a strategy requiring investors to time investments accurately. In other words, market timingis about knowing when a stock, sector or market is about to reach a bottom in its price, in which case it should be bought, or when it is about to reach a top, in which case it should be sold. It is an investment strategy that attempts to predict the futureof the market by studying the available economic data. Fundamental and technical analyses are used to make such predictions. Thisact requires investors to keep a constant and close watch on the financial markets. By predicting the right market timing, certain buying and selling decisions can be made in order to earn profits. Market timing plays a crucial role in switching between sectors or securities to gain from a change in the market’s outlook.

Market Timing: How it Works

Market timing can be used to earn profits by:

Selling financial assets during upturns.

Buying and securing capital assets during downturns.

The two vital information sources supporting the market timing strategy are:

• Technical Data: Quantitative information on price fluctuations and trading levels.
• Fundamental Data: Quantitative as well as qualitative information on developments that might influence the price levels.

Some market timers shuffle between stocks as frequently as every hour to earn a series of small profits. Although most followers of market timing operate on a long term basis, they make immediate responses on recognizing an opportunity.

Market Timing: Benefits and Dangers

Some of the benefits of market timing are:

• It reduces the instability of returns on investments.
• If executed well, market timing can save an investor from substantial losses.

However, there are some disadvantages associated with the practice. Given that there is always a trade going on, market timersmay fail to benefit from bull market trends. Market timing does not guarantee 100% accuracy, since there are numerous global deals occurring almost simultaneously. Investors often pull out from the market near rock bottom prices in a state of panic. Once the market begins to improve, these investors often try to regain exposure to the same stocks by buying them at a price higher than what they sold them at.

Market timing has been a subject of controversy among investors. Many investors (particularly those with an academic background) do not believe that the market timing strategy can predict market actions successfully. While there are several tools to spot the movements in market, none of them is 100% reliable.