|
Immediate Profits vs. Delayed Rewards
Which Is The Key To Success?
Although it is easy to forget after several months of advances, 2004 was an extremely difficult trading year. Until late summer, the markets were in a trading range that we doubt was profitable for very many.
But the late year rally changed all that and by the close on December 31st, the stock market had solid gains. The FibTimer timing strategies also beat their respective benchmarks (again) and some, like the Small Cap Timer and REIT Timer had huge gains.
The Small Cap Timer ended 2005 with a + 35.6% gain vs. a + 16.9% gain for the Russell 2000 Small Cap Index. The REIT Timer realized a 31.7% gain in 2005.
Not too shabby a year.
But at the start of 2005 we had several days of heavy selling on expanding volume that reminded investors just how quickly the market can turn. In fact, the fear levels jumped so much on Monday and Tuesday that our daily market studies had several short term buy signals.
But market timers should not be affected by a few days (or weeks) of selling. Our eyes should be focused on future profits. That is what market timing is all about. Following a strategy that beats the market "over time," and protects capital during bad times.
Did the first few days of this week worry you? They should not have.
In this commentary we look at the psychology of traders. The need for immediate rewards and the inability of so many to recognize the value of delayed rewards and follow a plan to achieve them.
Why do so many investors and traders fail to achieve profits? One of the reasons is below.
The Need For Immediate Winning Trades
The term "impulsive" is often used to describe people who "can't wait. They can't delay; they've got to have it now." So they are willing to forgo something better that comes later in order to get something right away.
This is NOT a trait you want to have as a market timer.
If someone offered you a choice between a smaller amount of money ($100) available immediately and a larger amount ($1,000) that could be received after a specified delay (3 years), which would you take?
You would be surprised at how many would take the $100. In fact, a great deal of the buying and selling going on in the stock market every day is by those who are looking for that quick $100. Very few are thinking about the $1,000 and even fewer have a strategy to achieve it.
Why is it people engage in behaviors, the long-term consequence of which is worse for them? Why do you have that incredible chocolate cake right "now" when you're trying to lose weight, or trying to stay healthy, or trying to stay fit?
One of the reasons is that being healthy or being fit is a "delayed reward." It occurs later.
While the desire to succeed in market timing is perfectly fine, the desire for immediate profits and winning trades is not. It clouds the real goal. Making large profits over time. A goal few investors ever achieve.
Motivated By Immediate Rewards
The market is unlikely to hand "immediate awards" to you. Although market timing is all about being profitable, it is not about satisfying our emotional needs. Rather, it is the following of a rational plan to create wealth over time.
A winning market timer must tirelessly execute a trading strategy that will often come into conflict with the timer's emotions.
The outcome of any one buy or sell may not produce a profit. It's quite possible that the overall outcome of a series of buys or sells may not produce a profit. It is essential that these possibilities be acknowledged.
People are motivated by rewards and in modern society that usually means money. The more money we are offered, the harder we work.
Perhaps you were attracted to market timing because of the large potential profits you would make in the future. It's natural to want to receive a reward for your hard work. But if you expect an immediate reward for your effort and it isn't forthcoming, you'll be frustrated and disappointed. And when it comes to market timing, immediate rewards aren't always there.
For example, everyone expects to get paid on the date their paycheck is due, but have you observed what happens when a paycheck is late? Everyone is quite frustrated and some people can get very angry. People were expecting a hard earned reward but received no reward.
Unless one has the right perspective, market timing can feel that way also. One may put in an enormous effort and receive no "immediate" reward for it.
If one is "expecting" an immediate reward, it can be frustrating and disappointing when it does not appear. That is why it is important to take the proper perspective with market timing, and the proper perspective can only be based by looking at timing results over a long time frame.
The Big Picture And Laws Of Probability
It is essential for a market timer to think in terms of the big picture, and in terms of probabilities. You must realize that the outcome of any one buy or sell signal is not significant. It's the outcome over time that matters.
The more trades you make with a winning trading strategy, the more the law of averages will work in your favor, and across the series of trades, you'll be profitable.
Market conditions, as we all know, are not always conducive to our plans. This is a reality of market timing and it's necessary to prepare for it. If you are aware of this, you'll be less likely to react emotionally to losing trades, and also less likely to make bad decisions when they occur.
Seeing the big picture, and sticking to the trading plan, are the keys to timing success.
Conclusion
If you anticipate that you won't win on a single buy or sell signal, you will not feel disappointed when it happens.
If you acknowledge that you may not profit even after a series of buy or sell signals, you will similarly be able to deal with it, bounce back, and be ready to take the next trade.
But on the other hand, if you aren't prepared for these possibilities, you'll feel frustrated and disappointed. You may feel like giving up on timing.
Some market timers hit the jackpot and start right at the beginning of a profitable trend. Those who started in mid to late summer 2004 made immediate and substantial profits.
But typically, we start our market timing during difficult market conditions.
The right perspective goes a long way in coping with the inevitable hard balls that the market throws at us.
Those who stay the course reap the rewards over time.
Recent articles from the FibTimer.com market timing services;
The Grass May "Not" Be Greener On The Other Side
Sector Timing - Diversified and Profitable
It's All In How You Play The Game
Predicting The Future
It's Different This Time
A Closer Look At "Price"
Investor vs. Trader...Which Are You?
The Other Side Of The Trade
Market Timing And The Presidential Election
Let Your Profits Ride...Rules For Successful Market Timing
Critical Issues For Market Timers
For prior commentaries still posted on the website, Click
Here
© Copyright 1996-2005, Kollar Market Analytics, Inc.,
All Rights Reserved.
FibTimer reports may not be redistributed without
permission.
Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable. |
