Some advisers and investors say timing the market is a fool’s game and every investor should avoid it, because it is impossible to do it successfully and whoever tries it he would lose his investments. These investors and advisers either misinterpret timing or do not understand it at all. Obviously, timing the market doesn’t mean buying low and selling high, fishing for the bottom when stocks seem cheap and waiting for them skyrocketing. If this is the timing, then yes, investors will lose their money.

Timing the market by waiting for stocks dipping, decreasing in price to buy them and then waiting for them to grow again is not the best approach and all advocates are right saying it. What I understand as timing the market is waiting for the right time to buy stocks and waiting for the right time to sell the stocks.

Timing the market – buying stocks When I say that timing the market when buying stocks means for me waiting for the right time to buy stocks, I obviously do not mean waiting for the stock itself, its best price or whatsoever. I mean waiting for the right conditions to buy. Waiting for the stock and its best price may cause that the investor ends up waiting forever.

Time buying stocks – wait for the market

When I started investing again in 2006 I believed I knew everything about investing and I didn’t expected I would ever experience the market like this one. S&P is down 40% or more and there is no bright future outlook out there. This is the right time for timing the market. It is frustrating seeing investment money sitting on the account in cash, but waiting for the right time when it will be secure buying new positions again is the best approach today. There are investors in the market who are bargain hunters, long term investors and they are probably buying now. However, it is not my game and I do not play it. The market is not ready yet and I do not want to lock my money in insecure positions.
My friends are asking me whether I consider the stocks cheap enough to start buying or not. Honestly they seem darn cheep right now. Quick look at financial stocks, energy stocks, real-estate stocks, all they are cheap as they were five or more years ago. Sometimes I feel tempted to start buying. Lets take a look at Apple (AAPL). It is down from its $200 or so high to $107! Isn’t that stock cheap? Maybe. However my answer was no. I don’t recommend buying, because the stock market doesn’t show strength and nobody knows whether it would go further down and even our Apple can continue its downtrend. What if Apple stays at this price level? How can we recognize whether it will return back and make new highs or stays at this level for many coming years? The economy or market may remain at this level for many years. In 1929 it took 4 years after the crash to get the US back to prosperity. Buying stocks now would cause locking investor’s money into a stock which even cheap it still can continue in its downtrend for some long period. Who wants to have available funds in such stock? Isn’t it better to wait for the market to show the willingness rising again? After the entire market confirms its rally, it would be the right time to start buying those cheap stocks even though at that time they may become more expensive than they are today – they still may be cheap enough.
Today the market is still in correction. It probably reached its bottom, but who knows how long it stays there? Timing the market in this manner it is not fool’s play but wisdom every investor should learn.

Timing the market – selling stocks

When some investors looked at their 401k plans these days they could suffer some bitter surprise. I am one of them as well. My 401k plan is down some 24% (which is still pretty good result), but my investing portfolio is down 14% only (thanks to my own indiscipline and impatience). If I have followed the rules I am writing about I could get better results. What is my point? I do not consider long term investing – buy and hold to be a holy grail of investing. There are Nobel price authors who documented that for example S&P over long haul provided the very best results than any other approaches ever, however I do not want to invest my money and then wait 30+ years to get 20%+ profit. Thanks to the 2008 crisis some portfolios are down at the same level as they were some 10 years ago. No profit after 10 years of investing money locked in stocks in long haul? Not for me.
I believe that investors should manage a portion of their portfolio so they create a money machine which will work for them until their last moment of their life. I want such a machine! This small account shall be my “Colorado University of Investing”.

What timing the market in regards of selling means for me? When the market goes down and changes to a bear market, I sell all stocks which do not perform well or touch the stop loss. This is the best way to protect invested money.

Timing the market, when experienced investor knows what she is doing, is the best way how to protect her account against losses and achieve same or better results. So don’t be fool and time your trading.

This market is a very good example what it means to be impatient and have no discipline. For me it is a very good lesson which I need to repeat myself every time I try to make trades when the market is not ready.

What actually happened? In the beginning of August the market showed a follow through day and IBD later changed their market indicator to “confirmed rally”. However they warned the market is not ready yet. However I could see couple stocks doing well during the bear market. At that time it was AFAM, which rallied no matter what the entire market did. My screener showed some results and I thought it was the time to jump into those stocks because it was the time when they would rally and I had to be there not to miss it.

Today it is Life Partners Holding (LPHI) which shows similar resistance against today’s sell off. I was also tempted to buy it, but the lesson the market is giving me again and again tells me to resist.

The very first rule of Reverse Scale System is to buy new stocks only when the market is in confirmed rally, which means the 50 day MA is above 200 day MA and in uptrend.

It was not in August when I bought my quick-rich stocks, it is not today. Today I closed two positions, because they touched my stop loss. I am also eager to jump back to those stocks because tomorrow they will definitely rally back up. But I don’t know it. I do not have information saying it will happen and it will grow only and only up. This is not my system rule as well so by doing it I will brake the rule again.

The next stock picking rule says I should pick up only stocks which have growing momentum and none of those stocks which plummeted today are showing any growing momentum. Should I be fishing their bottom? Lose another money because nobody knows where the stock market stops its slump?

Well I need to learn from this lesson to wait for the market telling me that this is the rigth time for buying new stocks. Until then I will be saving more money for future trades and wait.

When I advocated for savings in my previous post, I did not say that investors should save their whole life and then die. The goal is to become financially independent, create enough passive income so an investor can stop working if he wishes and basically retire. However he needs to start somewhere first. It is my goal to buy enough assets, which will generate money for my mortgage, bills, vacation and savings. Jessie Livermore in Reminiscence of a Stock Operator says that it is a bad way wanting the stock market paying your bills. He says that his colleagues wanted the stock market to pay them for an expensive suit or whatever and they lost money instead. I see the point here, but I am talking about generating an income by trading stocks, stock options and commodities the same way as he did during his life.

Trading in the stock market is a business as many others. People do not see the market this way in many cases. They consider trading stocks very dangerous and risky. For about 80% of all investors it is a risky business.

The profit everyone can reach in trading stocks is equal to the risk the trader is willing to accept. The higher risk, the higher profit an investor can take. However every investor can get incredibly, awfully rich by trading stocks, he can get deep broke as well. Unfortunately all statistics show that the majority of investors belongs to the second group and they are responsible for it themselves. If any trader or an investor wants to make money in the stock market, get rich or trade for a living there is a chance on the market to make it. The first thing an investor should do is to consider the trading as a business. A business as many other businesses. An investor shall have his “company” (it can be imaginary one at the beginning) which trades stocks, stocks options and commodities, he would need a business plan and money management the same as other businesses. However unlike the conventional business an investor doesn’t care about overhead, employees, suppliers, clients, competitors, marketing and many other issues a conventional business does. Every investor can trade from his home or wherever she currently is – from a hotel on her leisure trip, from Europe, China, Brazil or wherever she can get an access to a computer and Internet. The only competitor and “enemy” in the stock market is the investor himself. He usually fights his lack of discipline and the way he treats the market.

Another advantage of this business is that unlike other businesses an investor doesn’t need a large starting capital. Today it is enough to start with $2000 or even smaller amount. It is better to start with larger one since a small account is riskier and it is earning smaller money. The ratio between the risk and the profit is too bad. For many new investors 2000 of dollars represent a large amount however. If an investor starts investing into mutual funds, and stocks which are less risky than commodities there is a great chance to become a successful trader. I do not recommend trading commodities at the beginning. Without proper experiences it is a sure way how to wipe off the portfolio. I did this mistake so do not repeat it. As a successful trader an investor doesn’t have to work 8 hours a day, it is enough to work couple minutes a day, however before an investor becomes successful in the stock market, she needs to work hard on her financial education, study a lot and practice a lot. Not everyone can make it however. Many new investors think that the stock market is easy money and they can get rich overnight without working.

The first step every new investor should do is to invest in his financial education. He should know about money, money management, risk management, savings, investing vehicles, stocks, commodities, how the stock market works and many other issues. By studying everyone can reveal the secret of making a lot of money in the stock market. However an investor shall avoid all mistakes and myths she can find during her stock operator career. I followed the same path as many unsuccessful investors. I didn’t know about investing anything and I started immediately even in commodities. I also believed that making millions in the market is a piece of cake and I can make it without any education, just buy low sell high. I also was trying to find the easiest way how to get rich overnight using my magical short cut. I was looking for information everywhere, asking for tips and suggestions, let brokers do my business and much later I realized that it is only my own education and experiences, which can make me rich. I paid a tuition for these lessons. A new investor shall be ready to pay his tuition too.

If you know someone who is already trading for a living and you would have the chance following such experienced trader, this wold be your best school ever. If you do not have such opportunity, the best way is to study books, attend seminars and paper-practicing your strategies prior starting investing with real money. I am a kind of person who do not like fake trading much when trading stocks. With virtual trading an investor can not feel the fear of loosing money because he actually doesn’t risk them. This is why I opened this small account and I do my practicing on it. I could afford it because I already know all basics how the stock market works, how to submit trade orders, how they are executed and so on. However testing the strategy I adopted I wanted with real money so I could test my psychological responses, which I couldn’t get with paper trading. However if a new investor doesn’t know anything about trading stocks I strongly recommend paper trading to get familiar with all basic principles. For example I have never traded stock options and I have no clue how to trade it. I do not know how to read option chains, evaluate options, etc. I am a person who like learning by examples and a real practice than just reading or listening to someone explaining how it works. This is why I opened a virtual account at CBOE and I started practicing and figuring out how option trading works. If a new investor is as green as I am in options, she can open her virtual account and try it first without risking her own money. A good web site is Investopedia and their Stock Simulator.

Trading stocks in the stock market is technically very easy. The most important and the hardest part on trading is investor’s own psychology. The greatest enemy of every new investor ever. All of the new investors make a lot of crucial mistakes in this field. The lack of trading records, money management, risk management, discipline and many other aspects, which are missing in most investor’s armament are sure ways to losing money. Many new investors don’t even think, it is important to have such management. Nobody can make money in the stock market without knowing risk and managing monies to protect the portfolio. I learned this lesson recently. I understood I need something, which would organize my trading, some rules and a risk management which would work and protect my account by strict following it. I found what I was looking for.

When I started investing many years ago I had no plan, no strategy, no discipline and I was losing money. However I was reading books and trying to find some good strategy which would protect my capital and make me money in this stock investing business. There is a lot of books about investing. Many of them advocates for many kinds of strategies. Many recommends investors making business plans, loss control plans, money management plans, rules etc., but none of them actually tells you how to do it. Maybe there are some books out there, but I haven’t found them yet and I do not have enough money and time to buy all of them to find some.

However there is one book, which I found very valuable and which is probably the only one which tells you that. I am talking about Stock Market Stratagem by Braden Glett. I am not going to re-tell the story and rewrite the entire book here. It is the kind reader who should read it to grasp the idea of this strategy. If a reader doesn’t want to buy the book he can find information on the Five Minute Investing website or go to Useful Links.

However let me provide a short excerpt why I consider buying this book invaluable. It is the first book providing a beginning investor with a step by step guidance how to create a control loss plan, evaluate stocks and many other helpful advice on investing in the stock market. What many other books just vaguely say about investing, Mr. Glett is explaining step by step.

What are the basic rules of this strategy?

1) Buy a new stock position only when the market is in confirmed rally

I made this mistake all the time. I was buying no matter what the market did believing my stock would survive correction easily. Why not they were all fundamentally very strong. Obviously they didn’t and stop loss limits kicked me out and I ended up collecting one loss after another. Then i learned to follow the trend of the entire market, but with no further progress. I still was losing money. I was following IBD and their “market barometer” but it didn’t work either. It happened that IBD considered the market in confirmed rally but it was a short live rally. Even as of today IBD calls the market in confirmed rally. However look at the chart. Do you see any rally?

I do not see any yet. Maybe there are some experienced investors out there who see it and are ready for trading. However the only thing I see in this chart is two short live rallies only. Mr. Braden Glett is adding one more rule to identify the market in rally. The 50 day MA should be above 200 day MA to consider the rally really confirmed. In his book, you can find why. As you can see, the first circle indicates that the rally in May 2008 almost made it (a brown line almost got above the red one). Then it failed however. The second larger circle indicates the confirmed rally as per IBD. I don’t see anything. This is why I kept my own market status in “Correction” on the top of this blog. When the market gets above its resistance line (thin blue straight line) I would change the status into a “rally attempt” and when 50 day MA gets above 200 day MA it would be a confirmed rally. I made the same mistake again when I implemented these rules into my trading in August 2008. I didn’t wait for this rule to happen and I started buying. Now I could have dreamful nights instead of having my portfolio in 6% loss.

2) Select only fundamentally strong stocks with a momentum

Easy said difficult to do. Many books advocates the same. Many books let you going thru balance sheets, do difficult research, study companies’ tables, etc. IBD provides such service for subscribers and select all fundamentally strong companies for them. However a subscriber has to pay about $160 a year to get those tables. There is one easier way to select such companies. One of the rules is to look for the stock making new 52 week high. There are many other rules in the book how to evaluate stocks.

At the beginning of this portfolio I broke this rule as well. I am a human and I fight with impatience and get-rich-quickly madness. When the screener stopped selecting new stocks I have bought pets. Another way how to get into a financial hell. However I passed those lessons and will not repeat this mistake again. This blog shall be my watch dog helping me to follow the rules by identifying my thoughts why I am buying, selling, etc.

I created a screener which I fed with all criteria Mr. Glett is naming in his book, however I modified them a bit. I added some other rules from CAN SLIM strategy (screening criteria William O’Neil is presenting in his book How to Make Money in Stocks), but I made the criteria stricter than both authors recommend, so the only very best stocks should pass through the screener. A good training for patience.

3) A Control Loss Plan

This is probably the most invaluable section of the book. For many years I have been struggling creating some sound investing plan which would work, protect me against losses, protect me against over-extending the risk, help identifying the risk at all, avoid over-investing my portfolio, etc. I usually invested all my money and was forced to sell upon a margin call. Or I set up a stop loss order about 7% below my purchase price as many other books recommend and ended up collecting one loss after another, so my portfolio ruined down by 60%. This control plan in the book shows the proper way how to protect the portfolio against extended draw down even with stop loss bigger than widely recommended 7% – 10%. Even with 50% stop loss an investor can lose only 3 to 5 per cent of his money when the monies are managed correctly. This stop loss may sound horrific, but believe or not I can sleep much better knowing that next day I wouldn’t be kicked off with another loss. Mainly in this volatile market we are experiencing these days.

Well, these are the main items I would consider the most important and for which I recommend buying this book. The book is of course full of many other advice such as pyramiding, trailing stop loss and many others. Read it and you would see what strategy this blog records for the future.