Timing the market is always a tricky thing. Since no person can predict the future, there is no guaranteed way to get it right.
Ultimately, successful trading or investing is not about perfect timing. It’s about strategic risk taking and position building.
If you’re swing trading, you set your loss limits based on your risk appetite and capital resources. If you take a loss, you’re not entirely destroyed.
If you are position trading for the long-term (the focus of our article), then it’s about incrementally “building” your position, whether the market goes down, or up.
But you might not want to indiscriminately buy when the market is falling or rising. You want to carefully time your entries rather than time the markets (think “position” rather than “prediction”).
How might you do that? From a technical perspective, you first have to find a potential bottom and then a potential “retest” that doesn’t violate the bottom. Here are a couple of principles to consider when building your position:
Wait for the Panic-Selling
Some analysts believe that, historically, the last third of a bear market is when most of the declines take place in an accelerated manner. This is considered the panic selling moment. However, this may be hard to catch when a bear market has a short duration. But it is something to keep in mind.
When retail investors dump stocks, typically, institutional investors are buying them. What happens next? A bottom.
Many Bear Markets End in a V-Shaped Recovery
The point here is not to say that every V-shaped recovery is clear and apparent. Rather, when it takes place, most position traders and investors often miss it, thinking “is there another leg down?”.
That anticipated leg down is exactly the reason why you should consider the possibility that the last leg down was fueled by high-volume panic selling. If it was, then your chances of entering at the bottom might be stronger.
If not, then you’ve calculated your loss limit or position size to begin building your positions.
Building Your Long-Term Position On the Way Up or Down
Here are a few suggestions:
- If you have a small account, you might want to consider using Micro e-minis to build your position.
- Break your entire position into fractions, such as entering a tenth or a quarter of your entire single position at a time.
- Look for what appears to be the panic-selling decline.
- Wait for the retest of a potential bottom, and enter at the breakout from the nearest resistance.
- You might consider placing a stop loss below your presumed “bottom,” or if you are building your position on the way down, you may want to decide for yourself where to close the trade.
Ultimately, what you want to do is build your position on the way up after a technical retest of the bottom. Additionally, it helps to pay attention to the fundamentals too. If fundamentals seem promising while market sentiment seems pessimistic, then the odds to go “long” might be in your favor.
S&P 500 (SPX) – Daily – January 28 to April 16, 2020 (Chart created using TradingView)
This sure looks like a V-shaped recovery.
But there’s a big caveat: bears often end in pessimism while fundamentals range from tepid to optimistic.
Recently, the markets have been rallying and investors seem optimistic while the fundamentals–22 million unemployed, dismal retail sales, Fed unemployment forecast of 30%–are just a few of the economic data pouring in. We don’t know as of yet what the impact on the economy will look like, if only because the coronavirus pandemic curve hasn’t yet turned and states are still under lockdown orders.
So What is a Position Trader to Do?
Position traders who hold for the long term are investors. Some investors have already begun building their long positions.
While they may already be starting to build their position, they may still be expecting further downside. In that case, the smart ones are entering fractional positions only rather than going “all in” (in investment-speak, this is called dollar cost averaging).
We don’t know what the global economy is going to look like in the months ahead.
But based on the Federal Reserve’s efforts, and comments by the International Monetary Fund, both are forecasting economic conditions that may will be similar to the Great Depression.
Again, there’s no way to predict how bad, how long, when, or even if this will take place.
But if you position your entries around breakouts after seeing a potential bottom and its retest, and if you enter fractional positions based on your risk tolerance and capital resources, then you may be able to withstand the losses related to getting in too early.
The famous position trader, Jim Rogers, was quoted: “Oh, that’s the story of my life. I’ve always been accurate but early.” Perhaps we can learn something from this.
But right now, everything depends on the fundamentals. And the fundamentals at this point in time have yet to unfold.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.
Be advised that there are instances in which stop losses may not trigger. In cases where the market is illiquid–either no buyers or no sellers–or in cases of electronic disruptions, stop losses can fail. And although stop losses can be considered a risk management (loss management) strategy, their function can never be completely guaranteed.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.