I got into an interesting discussion the other day about the way I invest and trade. Because I use technical analysis, my friend assumed that I could predict the market’s next big move. When I replied that I didn’t care which way it moved, just that it did move, he called me a “market timer”.
In case you were wondering, market timing is moving money in and out of investments based on selling at market tops and buying at market bottoms. Predicting market tops and bottoms is as difficult at predicting human behavior. We don’t always act rationally or follow the rules, and neither do the price movements of a market.
As a market observer, my focus is on managing risk. Risk management is the process of moving money in and out of investments in order to maintain or lower your risk of loss. I have no idea what the market will do tomorrow, but I do know that in order to make any kind of money, I have to have money at risk
This is an important difference that all traders and investors should consider when they set up a personal investing strategy. After the run-up since late December, I’ve been expecting some sort of pull-back. Yet the market keeps going up.
Several years ago, I missed out an substantial gains because I “knew” the market couldn’t move higher. By focusing on risk management, I can now let my gains continue to build. I know that when the market does decide to act rationally, I’ll be able to lock in my gains.
Predicting Market Tops vs Observing Conditions
Barry Ritholtz – The Big Picture
This commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
Mr. Wenger is an investor, trader, entrepreneur, and consultant. In his “spare time”, Joel is also an avid motorcycle racing fan and back-country skier. He currently works in the greater Detroit area and writes columns for nextooze.com as the Detroit Investing Examiner.
Joel’s investing knowledge is shared via Invest-Safely.com, one of the most comprehensive and user-friendly investing resources on the web, as well as the Safe Investing Blog.
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