by Rick Ratchford
Because the trading of futures markets are highly leveraged, timing is crucial if you are to make a success of trading. If your timing is off, even by a small amount of time, you can sustain quite a loss.
Many have experienced the trade that got away, where the direction of the trend was correct, but the entry was made just a little early and the trade stopped out. The feeling of knowing you were correct, yet instead of making a profit you get a loss, is one I can still recall. It is truly frustrating. It all has to do with timing. If you are too early, you will likely sustain a loss. If you are too late, you can miss the profitable part of the trade and end up with a loss. Thus, timing is crucial.
The margin requirements are low, thus providing the leverage for making big profits. However, it also narrows the time frame in which you can be early or late. Unlike stocks where you can take a "buy and hold" approach, futures traders usually cannot take the pressure and expense of "holding" when timing is off. As a matter of fact, it is not wise to "hold" while accumulating losses but to cut them out quickly and attempt re-entry at a later time. If you make too many of these off-timing trades, you'll soon be out the margin needed to trade.
There are two camps on market timing. On the one hand, you have the Fundamentalist who attempts to time his trades based on market demand and supply numbers, weather and other related data. This is the trader that wants to know the reason behind the move, and thus use this information to time a trade entry when such circumstances appear again in the future.
The other is the Technician who attempts to time his trades based on chart patterns of past market action. It is the technicians opinion that market patterns repeat, and by identifying such market patterns in the future, the outcome can somewhat be anticipated.
Both Fundamental and Technical Analysis attempts to take currently available information and derive a timing signal from it. Whether it is past or present data, both camps realize the importance of timing. If timing were not important, there would be no need for all this research and calculations. The trader could simply flip a coin and enter on a chance.
Timing takes many forms. The two camps of analysis briefly touched on so far is a generalization. If you delve deeper into either form of analysis, you’ll discover that it is divided into even more variations. A Fundamentalist might specialize in Economic Forecasting, while another into the weather implications. A Technician may specialize in identifying market patterns, while another prefers using indicators such as oscillators and moving averages. There are also those who time by the planets, those who use only trend lines, and others that prefer to time by market cycles.
The path a trader takes will usually be unique. I do not believe that any two traders take the exact same path to their preferred approach in market timing. Rather, they will enter the trading field by whatever it was that attracted them in the first place, be it a promotional offer in the mail or a broker's cold call to open an account. From the beginning, the new trader is highly dependent on the original source that lured him or her in. From there, this trader can branch off into many different avenues that will be unique and their own. Thus, no matter whom a trader may attribute their success to as the greatest influence in their development as a trader, the end result will be all the trader's own doing. No one can pick the path you will take as a trader, only you.
It is hoped that along the path one takes, the keys to expert timing will be found. But for many, the paths taken usually end up at the beginning or a dead end. Only a few make all the right choices to expert timing. Unfortunately, even successfully managing the maze of information correctly and to a satisfactory result, some simply fail to take advantage of their timing acumen. The psychological barriers may be too great to overcome for some, and others may either run out of patience to break these barriers or simply run out of money.
There is simply no hurry when it comes to education. Timing is crucial for trade entry, but the path one takes to improve their ability to improve timing should not be rushed along. Patience is a psychological aspect that is rarely mastered by most. Yet, it is one of the most important psychological attributes a trader can attain. In a rush to make large sums of money, many traders get edgy to place their money on the line. Patience is tossed out the window, and the trader takes many bad hits on their account.
I've written several articles on patience, so I won't get into that subject too deeply here. Instead, the emphasis here is on the importance of market timing. Whatever path you end up taking to improve this aspect of your analysis, do not commit yourself to big losses. Trade the smaller and slower contracts. The Mid-American Exchange offers traders still working on their timing skills a lower risk arena to trade. Paper trading is certainly an option also, but it lacks the emotional attachment that is so part of real trading. It is this trader's opinion that using a little money is a far cry better than none at all. Even a small risk will let you feel the emotions associated with getting a profit or loss. As you learn to develop the all-important skill of timing your trades, you will also be able to associate the emotions involved. You need this mental connection, the emotion and the action, if you are to have any hope of duplicating your actions to become a consistent participant.
Remember, it is one thing to be wrong and take a loss, and to be right as to direction and still lose money. Timing should never be taken for granted. Timing is crucial.