![]() That way I can still end up with some exciting stories… without losing the farm. So I set a small portion of my portfolio to the side for fun trading. But I still like to have a little excitement in my portfolio. With all these considerations to factor in, I avoid trying to time the market. If you’re focused on short-term trading and market timing, Uncle Sam can take a bigger cut of the gains. Some of these Warren Buffett quotes explain that strategy.Īnother downside of market timing is that short-term capital gains are taxed at a higher rate. Many of the world’s best investors stick to a buy-and-hold approach. Market timing doesn’t work for most investors, and intelligent investors have taken note. This allows them to improve their strategies. They take a systematic approach and base their trades on research. But some of the world’s best traders have learned how to avoid it. When your hard-earned money is on the line, it’s not easy to avoid trading on emotion. When it comes to exiting a position, loss aversion and other psychological pitfalls can lead to lower returns. We seek short-term gratification, and this often comes at the expense of better long-term returns.įear is also an emotion that leads to poor trading decisions. As with gambling, we can get attached to the reward potential and overlook the risk. Greed is a powerful emotional state that plays a role. We have tendencies that push us to make poor trading decisions. For example, many people are familiar with our fight-or flight response. Our brains have developed to think in certain ways. But trying to time the market gets even worse… Now let’s look at another powerful force that shows why market timing doesn’t work… Psychology of Trying to Time the MarketĪs I’ve already shown you, the odds are stacked against us. And once again, it is possible to find a strategy that works. If you think you can beat teams of engineers and scores of folks with doctorates in math and statistics, more power to you. Overall, retail investors are up against more knowledgeable and better-financed traders and systems. It could then automatically trigger a trade based on patterns it finds. For example, when the Federal Reserve releases minutes from its meetings, an algorithm could analyze it for keywords and phrases. This is a direct way to profit on market timing. Lowering the transmission time of trading data by a fraction of a second can lead to millions in profits simply due to scale. Some hedge funds and firms are spending billions to trade automatically and move trading data faster… ![]() These can come in the form of high-frequency trading, which shaves pennies off trades. They create trading systems to take advantage of market inefficiency. These big firms hire some of the best minds in the world. On top of that, retail investors are up against institutional investors. If you trade often, these overlooked fees add up and put the average retail trader at a disadvantage. And if liquidity is low, the bid-ask spread can be wider, and that can lead to a larger cut. This usually part of the difference between the bid and ask prices. But market makers still take a small cut. Thanks to technology, trading fees have, thankfully, come down. And this makes trading worse than a zero-sum game for retail traders. That being said, trading fees and market makers cut into the trade. For every buyer, there’s a seller on the other side. In the short run, the market is a zero-sum game. Market Timing Is a Zero-Sum Game in the Short Run Especially if you have the right strategy. And second, we’ll dive into some unique psychology that holds back traders. First, I’ll explain why the odds are stacked against retail investors. To understand why this holds true, I’ve broken my argument into two compelling explanations. At least if your goal is to outperform the market. But market timing doesn’t work for most investors. It’s a thrill to jump in and out of positions.
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