Profit Targets... Important? Or A Really Bad Idea.

Predictable vs. Unpredictable?

Many traders and investors set goals. Typically, a goal might be to achieve a 12% gain every year.

Although it is pretty obvious that the markets cannot be depended upon for a "steady" rate of return, the question is, is it even a good idea to set such goals?

Would you rather have a steady return of +12%, +12%, +12%, +12% over the next four years?

Or an unpredictable rate of return with potential drawdowns, say, 0%, +50%, -5%, +40%.

Assuming the goal of 12% yearly is set for the next four years and you have an investment of $1000 to start, +12%, +12%, +12%, +12% means in four years your investment would be worth $1,573.

But what about the unpredictable returns? 0%, +50%, -5%, +40% over four years will increase your original investment to $1,995, even though you spent the entire first year with no profits at all and lost money in the thrid year. That is a 27% greater a return overall.

There were long periods of time when you had no gains or suffered through losses, and you likely felt like like those periods would never end.

These numbers are very realistic. Volatility can be your best friend. Read on.

Catch A Trend, Let It Ride!

Market timers using trend following strategies such as those at FibTimer.com have no desire to try and reach, or to force results to meet, a preconceived profit target.

If, for example, we set a profit target of 12% and exited one of the incredibly profitable short trades such as bear trades in the 2000-2002 bear market, we would have greatly reduced our realized gains. Why exit a trend at 12% to guarantee a profit, and then sit on the sidelines watch the market go up another 60% or 70%?

In fact, we have no profit targets at Fibtimer. Our goal is to catch every tradable trend, and when we do, to let it run as far as we can before exiting that trade.

That means when there are no trends and volatile sideways trading, we will have no gains and possibly small losses. But it also means that when the market does trend, and history shows that markets are in trends 80% of the time or better, that we will let our profits ride and take every bit of the gains as profits.

Trading Every Trend

One issue faced here at FibTimer, and we expect faced at all timing services, is the pressure felt by nervous subscribers. Believe us when we say it is an issue. We read and reply to all emails.

But here is our answer to nervous subscribers. If we reduce risk as well as reduce volatility in our strategies, in order to minimize drawdowns (during those times when they occur), we also lower returns over time!

There is no way to trade all trends without taking the risk that the current trend might be a false one. Risk management used at FibTimer limits losses and protects capital, but at times, small losses are inevitable.

By trading every trend, we are guaranteed that we will be on board of every money making advance, and every money making decline (bearish trades), that the future brings us. But you must be around for the money making trend, and you must have taken the trade, to realize the profits when we get them.

Lessons Of History

Remember the crushing losses of 2000-2002. The Nasdaq dropped 80% and the S&P 500 lost 50%. It would take the Nasdaq 2.25 years of 100% yearly gains (from the lows) to again reach its old highs. Or to be more realistic, it would take over 6 years of 30% yearly gains to again reach its old highs. No losses allowed!

What do you think the chances are of this happening? It is now year 2008 and we are no where near achieving it. But our aggressive strategies tagged 100% gains during those bear years.

It is important that you approach timing with this in mind. If you give it a month and then quit because you have no gains, you are only fooling yourself. We will continue to make the profits over the years. Because we trade "all" trends we "know" future profits will be realized. Years of experience and hundreds of years of market history are behind us.

Stay patient, follow the buy and sell signals, and the profits from the next big trend are yours. We do not know when the next trend will start. We do not know if it will be to the upside or to the downside. Though we do try to look into the future in our weekly analysis sections, no matter what, we trade the trends. That is the key to success.