Market Timing and its Importance in Investing and Trading
This week we’re taking a look at a concept known as Market Timing, a crucial skill needed to maximise your gains when trading. Market Timing is essentially learning the behavioral traits and tricks of the market, which naturally (with enough dedication and commitment), you’d learn over time yourself. But to save you the trouble, we’ve mapped out our own knowledge and experience into a cheat-sheet designed to give you some useful pointers when starting out, or improving your craft, in the art of trading.
Factors to consider for Market Timing
ALWAYS check for any significant company news or influential political events, that may affect how the stock you’re looking at may perform in the near future.
It goes without saying… When looking to invest or place a trade, be patient and wait for the opportune moment to place an order. Each stock is different, and so, when you’re looking in to a company, be sure to check to see if there are any common patterns throughout the days.
As a very general rule, don’t place an order as the stock market opens, the trading volume is often at it’s greatest at this point, so it can quickly turn against you in a matter of minutes!
Remember that you’re likely already too late to invest into a company that’s just had a good quarterly report – what we mean by this is that a stock may be up 20% in pre-market trading, but once the gates open to the public, you often see huge selling waves, where you can see that 20% growth dissipate into 8% over the course of a day, it’s at this point that we would have invested, as the volume is low and the public have already decided what the stocks worth at that given time.
Try to make the most of post-market trading where possible. Some of our most successful and easiest trades have been where we read a quarterly report and where it’s good, we invest, all before the stock market opens.
For US stocks, the common quarterly release time is 21:30 GMT / 16:30 EST. What we’d recommend here is that you watch the company calendar, which you often find with most stock brokers, then find a company that is offered as pre/post market trading. Once you’ve found the company, wait for it’s quarterly report day, then read the report as close to it’s release time, and invest if you think it’s worth it’s a good move.
- A safer way to invest here is to read the report yourself, then wait up to 15-30 minutes to see how the rest of the market acts, then choose to invest / short. On one of our fastest trades we were in and out of a trade with UBER, where we made 10% in as little as 10 minutes, all by reading the report and waiting to see how the rest of the market reacted, then making the investment.
Technical Indicators for Market Timing
Pre/Post Market Trading
A stock that starts a few percent up before the market opens, often drops immediately by a few percent, and in some of our own most recent trades (which you can find here), we look to invest about 15-30 minutes after the market has opened.
- The reason for this is that there is often a large sell off as the market opens, as buy and sell orders get filled, so this volume doesn’t often last very long. You have to watch carefully for exactly where the bottom of the pit is, because once it hits it, it often goes up in a large way.
- Finding the bottom of the pit is a skill that takes time to learn, something we ourselves have learnt over time by becoming quite specialised in the US tech sector, which all seem to act very similarly.
Look for indicators of a stock that’s about to change direction – please do remember to check the news before investing as this can be a very easy way to gauge whether a stock is dropping or going up for a good reason.
An example of an indicator to watch out for is the buying force slowly outweighing the selling force, so the sudden drop starts to level out – you can see this at the bottom of the graph – as seen below;
What you’re looking at above is the trading volume which is heavily biased toward the sale direction, within an hour of the market opening, you can see that the selling force has almost exhausted and the graph levels and gradually starts going up.
Types of Trading and their influences on Market Timing
You don’t have long to react, so we use a 1 minute timeframe to ensure we capture the minuscule movements that you don’t normally see.
Mid-term Investments and Trades
When a stock has been dropping over the course of a day, we use a 10-15 minute time frame, once we see two strong Green candles, this can indicate that the buying/selling direction is about to turn.
Long-term Investments and Trades
When a stock has been dropping for a week or so; This is more complicated, at this point you need to engage many sources of data, such as news, politics, how the sector is performing etc etc.
- There isn’t an easy way to buy into a stock that’s dropped consistently for a week, but once again, as a general rule, we expand the time frame, to perhaps 2-4 hours, and wait for the stock to level out.
- Take a look at trends to see where the stock last bounced – I wouldn’t rely on this, but trends can and very often repeat themselves.
So there you have it, our ideas on using the markets’ natural cycles to your own advantage. Remember, these points come entirely from our own experience, which you can view and assess for yourself on our trading chart at 3moneytalk.org/investing/. If you’re new to trading, or even if you’re just looking to get that bit sharper in your performance, we’d suggest taking a look through our other guides here!
Have any of these techniques worked for you? Let us know if you’ve got any other great trading tips or ideas, and feel free to drop any that you think we’ve missed out below in the comments!