Market Timing Hidden Traps

Traders that implement a market timing strategy attempt to make predictions about the future movement of the stock price applying different fundamental and technical analysis tools. They are after profits that can be generated over a short period of time.

Timing the market, however, can be dangerous for investors that are making their first steps in the stock market.

On the other hand, being able to predict the future movement of a stock price can be valuable since you can purchase a stock before its price starts to rise.

The motto of market timers is "buy low, sell high". The most extreme market timers are those who make such frequent trades that can take place within hours or even minutes. Market timers' major goal is to obtain small, but frequent and in dozens profits that are generated on daily basis.

If an opportunity for making a profit is noticed by a market timer, s/he will hurry to seize it by moving in and out of the market.

Many opponents of market timing claim that accurate prediction of market movements is very risky and in itself represents a form of gambling.

On the other hand, defenders of market timing state that there are cases in which accurate prediction of market movements is possible. Determination on whether the stock is undervalued or overvalued is achievable through the use of different instruments. The latter are applied in order to decide whether the price of a stock is about to change its direction.

However, for the greatest disappointment to investors, stock prices are sometimes changed because of illogical reasons. Additionally, unexpected events can occur, which will quickly change the price when least expected.

The Hot Deal

You have probably received an advice on the next hot deal to generate you big profits. However, most of the time these big things end up in the trash since their price declines soon and drastically.

As a result the dreamed big profits are just a mirage. As a result of the long holding on of investors, they end up buying high and selling at a lower price. As you can guess, this is not a winning strategy you should bet on.

Piece of Advice

As an educated investor you should strive to put your hard-earned money in companies that you have well researched beforehand. They should meet your requirements regarding such factors as earnings, growth, income and etc. Undervalued stocks that the market has overlooked may provide you with just as good returns, but you should stay away from timing the market if you are a beginning investor.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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