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What Is Stock Market Timing and How Does it Work?

Market timing is a flexible strategy that can be applied for either long or short-term investing. It can be either bearish or bullish. The main idea is to make assumptions about the future security price at a certain period. Traders mainly rely on their individual belief of where the price will move.


In this article, you will learn more about stock market timing strategies along with their possible pros and cons.

Stock Market Timing Definition

So, what is market timing? To make things simpler, it is an approach when one makes his or her own predictions about where the price will move next. When making assumptions, traders generally consider a certain time with the price moving below or above the predicted level.

In other words, the strategy relies on sentiments based on a variety of trader’s personal ideas, assumptions, and beliefs. They can be backed by price historical data or various price chart patterns. The main advantage about the strategy is the ability to apply it to actually any security. At the same time, stock market timing is among the most popular approaches though some may also use bonds, precious metals, or real estate as the major investing instrument.

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Are Market Timing Strategies Risky?

Market timing strategies are considered risky. On the one hand, when applied correctly, the concept may result in huge payouts. However, it is very hard to repeat the same success using this strategy. In other words, it may not be the right option for building and growing wealth steadily.

How Does Market Timing Work?

It is possible to use the methodology in many different ways depending on what your assumptions are. As stated earlier, the concept can be applied to either long or short-term investments. Besides, it can be both bearish and bullish considering your predictions and further actions.

Types of Timing Market Strategies

For example, you target a stock that is currently traded at $50. You feel like the price is going to drop by the end of the week expecting it to be $48. So, you would probably want to short or put the option valid until Friday. Whatever you choose, you will perform a bearish move expecting the price to go down and making money on going short with a stock. However, if your prediction is wrong and the price increases, you will lose.

Oppositely, bullish market timing strategies consider prediction of price to go up. In other words, you will probably go long or put an option that is valid by the day the stock price is supposed to go up. If you want to make the most of the sentiment, it is possible to benefit from a margin debt though it will come with a greater risk of losing more money that you invested.

Another way to use market timing strategy is to go short on stocks in case of fear the market is about to crash.  It works when someone expects the formation of an asset bubble. The only downside here is that it is very difficult to indicate the exact date of the market crash, which means low chances to win big. But if one can, he or she will be able to buy back at much lower positions.

A systematic approach is the opposite concept of market timing. Instead of guessing the price movement, traders use formulaic tools and generally ignore the asset price. The main mission here is to purchase the same amount of assets on a regular basis no matter how the stock value changes.

The Bottom Line

Market timing strategies can be both profitable and risky. The main downside here is that traders can rely only on their personal assumptions with only a few ways to back up their predictions using historical data and specific chart patterns. At the same time, if you are so good at identifying the exact time and price movement, the approach will definitely work out. If not, it is a good idea to try out a different trading methodology.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.