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Does Stock Market Timing Work?

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The Pros and Cons  Of Stock Market Timing

Stock Market TimingA question that often crosses stock market traders and investor’s minds is: does stock market timing work?  Financial advisers strongly advise their individual investor clients to avoid stock market timing and to leave those types of trading strategies to professional traders and investors.  In reality, a strong case can be made both for and against stock market timing.

The case for stock market timing is that the stock market often does work in a cyclical manner, and if a trader or investor can identify reoccurring movement within the market, they can vastly increase their profits by timing when to buy into and sell out of stocks.  The case against stock market timing is that the stock market is erratic, and those who are not holding stocks because they are trying to time the market could miss out on unexpected upside moves in stock market averages.  Additionally, even if a stock market trader or investor properly identifies reoccurring movement within the market, many fail to act on the buy and sell signals they are provided by the stock market, and therefore fail to properly implement stock market timing strategies.

How To Implement Stock Market Timing Strategies

Unless one has the time to follow stock market events, then there is really no point in even attempting stock market timing.  If a stock market trader or investor is committed to following stock market events and identifying stock market buy and sell signals, then they can consider stock market timing.  Stock market buy and sell signals can include a wide variety of stock market indicators, from the average price /earnings ratio (P/E ratio) to investor enthusiasm (which is used as a contrarian indicator).  The key is to study the stock market timing signals and back-test them (see how they performed in the past), and then to act on them once they flash a buy or sell signal.  It is a good idea to use a variety of stock market timing signals to ensure you are not being fooled by an erratic signal.

A simple stock market timing strategy that does not require a lot of analysis, but is also not always a winning strategy, is to sell a portion of a stock trading or investment portfolio during earnings season, as stocks often enjoy a near term top when good earnings news causes them to spike higher, and then buy back the stocks for less before the next earnings season.  It is not uncommon for stocks to settle back after earnings season, when they are driven by news events rather than by earnings announcements.

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