CMU: Timing is everything

By Jani Ziedins | Free CMU

Nov 08

Cracked.Market University

Knowing what the market is going to do is easy. Predict a bear market for long enough and eventually you will be right. Telling people a dip will bounce is a no brainer because every dip goes too far and then bounces. Predicting is easy because the same things keep happening over and over again.

Without a doubt AAPL and AMZN will either fail or be acquired at fire-sale prices. How do I know? Because it happened to countless other innovative and disruptive companies. Amazon’s disruptions are minor when compared to what the Sears catalog did for rural consumers 100 years ago. At one time Sears was the largest employer in the United States, but now it is struggling for survival. More ‘experienced’ readers remember what Sears used to be, but there are also contemporary examples too. Only the youngest millennials cannot remember the ubiquitous ‘Crackberry’. Of course not even ten years later I cannot remember the last time I saw someone using one. There are a few still out there, but they are definitely on the endangered species list.

The challenge isn’t knowing if AAPL and AMZN will crumble, but when they will crumble. Don’t get me wrong, I’m not criticizing Apple and Amazon’s near-term prospects because both companies are at the top of their game and I am a happy and loyal customer of both of them. But I am also not naive enough to think their success will last forever.

Far and away the hardest part of trading is getting the timing right. Never forget this is where all our profits come from. Even over shorter timeframes, the difference between good timing and bad timing is the difference between making money and losing money.

People love to tell everyone they know how bearish or bullish they are, but what they often fail to mention is their timeframe. Bulls and bears often get in bitter arguments. One claims something is a fantastic buy while the other accuses it of being a house of cards. But you know what? Often they are both right!

In trading, timeframe is the only thing that matters. Your profit and loss is determined entirely by when you buy and when you sell. End of story. Good timing on a bad idea results in a profitable trade. Bad timing on a great idea ends in tears. If the bull is a swing trader, he could be totally right that the stock is poised for another breakout, but the bear could also be right that the longer-term demand for a company’s products is deteriorating and it will only be time before it shows up in the earnings. In this example the Bull hauls in a nice profit this week and the Bear’s trade reaps big profits next quarter.

This is why people should not get hung up on Bull and Bear monikers. Too often people treat this like a sporting match and they stick with their side through thick and thin and they hurl insults at the other side. The market doesn’t care what we think and we definitely shouldn’t let these false allegiances and counterproductive biases skew our perception of the market and other traders in it. I’ve seen way too much bitterness and hostility primarily from inexperienced traders who are way too emotionally committed to their positions. Most of the time the differences in opinion are easily be explained by different timeframes.

One of the most fatal mistakes traders make is changing their timeframe in the middle of a trade. For example they buy a company because they like its long-term prospects, but chicken out during a near-term test of support. Of they buy it for a quick bounce, but it turns into a long-term holding when it keeps going down. Never, ever change your timeframe in the middle of a trade. If a trade is not working, get out. If this is a normal gyration and your trading thesis remains intact, stick with your position. It is okay to admit defeat when a trade is not working, but never change your timeframe simply because the market’s price-action is making you second guess yourself.

In another educational post I will dig deeper into identifying when you should stick with a trade that needs more time, and when you should proactively bail out of a position before your losses get worse. Sign up for Free Email Alerts so you don’t miss it.

Never underestimate the importance of timeframe. Getting it right is only thing separating those that struggle and those that are successful. I wish there was some easy trick to getting it right, unfortunately the market is never that easy. This definitely falls under the art of trading and it takes time and experience to master. Don’t get discouraged. Keep at it and this will definitely get easier.


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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.