Market timing is one of the most popular methods used by investors to ensure that they make the most profit possible on their investments. The basis of market timing involves the investor attempting to purchase stocks when they are at their lowest price and then sell them when they are at their highest price. Despite how easy it sounds, it can actually be very hard.
For example, when attempting to purchase the stock at its lowest price, you have to make sure you purchase it at it’s lowest point. If you purchase it when it starts to rebound, you may have a hard time trying to purchase it. If you purchase it when the price is still dropping, you may end up losing more than you make. Now we will examine the mistakes that can be made when selling the stock. If you sell the stock when it is still rising, but not at its highest, you will not have earned as much money as possible. If you hang onto the stock for too long and it starts to drop on the other end, you may end up losing money.
The market timing method relies a lot on moving averages. Many investors utilize the 50 and 200 point averages. If the market has risen above the 50 or 200 day average, many people consider this the time to sell their stock. If the market has fallen below the 50 or 200 day average, it is now time to purchase these stocks. Others say that using the 50 and 200 day averages are pointless because most stocks are so volatile that these methods are not effective in predicting the price of stocks for the future.
Many financial advisers caution against using market timing because it makes the investor more reliant on charts and not the real life economy. Many financial advisers also say most investors have bad timing, are less aware of the risks they are taking when the markets are high, but more aware of their risks when the markets are low.