MARKET TIMING FOR THE INVESTOR: Picking Market Tops and Bottoms with Technical Analysis

By BC LOW

The task of timing of market tops and bottoms is a huge challenge for investors and traders. Intuitively we look for market bottoms to buy and market tops to sell -- basically, timing the market.

This book showcases a new approach that technically picks market tops and bottoms for various trends, short to long term using an innovation of the Directional Movement Index (DMI), created by pioneer master technician Welles Wilder. The innovation is named the Triple DMI System.

The author's first title, Integrating Technical Analysis for the Investor helps the investor to integrate technical analysis for investing. This title completes the approach by helping the investor to technically time the market!

• Language: English
• Publisher: eBookIt.com
• Release date: Jan 15, 2020
• ISBN: 9789811440748

Book preview

METATRADER

FOREWORD

When I started dabbling in technical analysis in the mid-90’s, one question I would often ask myself was, What if I opened a long position and the market tanked? Over time and especially after I started my technical analysis career in 1999, I found out many traders and investors face a similar dilemma. When a bull market is under way, nobody wants to miss out on opportunities. But at the same time, there’s a fear that perhaps the market is close to its peak.

There’s no way of knowing before the fact. It’s reasons like this that earned technical analysis a reputation of working only in hindsight. Identifying market tops and bottoms, trends, or breakouts were obvious after they occurred. Technical analysis wasn’t considered a viable tool to forecast price movements. But you could say the same about fundamental analysis. Analysts can anticipate earnings numbers or a company’s future growth potential but can’t anticipate news events that could hurt a company’s reputation. When it comes to the financial markets, there’s no certainty.

When I was Editor of Technical Analysis of Stocks & Commodities magazine (2000–2019) I came across several strategies developed by prominent people in the industry—strategies credible and worthy of being placed within the ranks of any prominent wealth advisor who followed fundamental analysis.

BC Low is one person who fits the bill. When he submitted his first article "Trading, Time Frames, and Trends" for consideration of publication in Technical Analysis of Stocks & Commodities, what caught my attention was his methodical approach. The concept of looking at charts of different time frames wasn’t new but it’s something traders often don’t apply. BC’s step-by-step approach is one that traders can incorporate into a pre-trading checklist. This methodical approach carried over to his next article, Identify The Start Of A Trend With DMI (Directional Movement Index). This article also debunked two commonly held perceptions of technical analysis - that it’s used only by short-term traders and can’t be used to forecast price movement. Understanding a technique to identify market tops and bottoms as they are forming was eye-opening. And, it’s a strategy that could be used in different time frames. That’s right, even long-term investors can use technical analysis.

When BC told me he was publishing "Market Timing for the Investor: Picking Market Tops and Bottoms with Technical Analysis" and was using a version of the DMI that was discussed in his article, I was curious to find out more. BC goes into great detail about his 3-Directional Movement Index (DMI) system and shows how with the 3-Directional Movement Index, investors and traders can help reduce the risk of opening a long position just as a market is approaching its longer term peak and vice versa. His 3-DMI system can be used on at least two popular charting platforms. That means you can test it, modify it, tweak it … basically have fun with it. Consider it a valuable gift.

Happy reading and trading!

Jayanthi Gopalakrishnan

Managing Editor, T3Custom.com

CHAPTER 1 : INTRODUCTION

Investors are challenged to make returns that meet their expectations and needs. The established golden rule for investing is buy and hold, not to time the market. The reason for this is that timing the market leads to poorer returns.

Market timing however, makes a lot of sense to me. It is fine to buy and hold, but buying at market tops will not give the best returns. Similarly, selling at market bottoms also does not yield good value. What is needed for the investor is a technique to reliably pick market tops and bottoms for the longer term, as cycles exist in markets.

Armed with an effective timing technique, investors can plan entry into a market as it approaches a longer term bottom, or exit their positions at longer term market tops. This allows the investor to take better advantage of long-term investment opportunities. The other advantage of an effective technique that picks market tops and bottoms is that it can help investors avoid errors of buying at long-term market tops, and selling at long-term market bottoms.

Technical analysis is most often associated with short-term trading, not long-term investing. But that is not so for me. I have always believed that technical analysis is neutral to time, being an approach that merely interacts with price, whether it is a Daily chart or a Monthly chart.