Trading Is All About Timing

Trading is always a game of time. To grasp this, consider that one of the largest increases in stock market history came on Oct. 19, 1987, the day of the market’s greatest crash. Stocks had plummeted 23% before the end of the day, but about 1:30 p.m, they launched a huge recovery that saw the Dow Jones and S&P 500 indices verticalize off the bottom, climbing more than 10% before running out of steam and dipping down to end the day on the lows.

While most traders lost money on that day, individuals who bought the bottom at 1:30 p.m. and sold an hour later saw some of the biggest short-term gains in stock market history. Traders who shorted at 1:30 p.m. and then covered in a panic an hour later had the terrible distinction of losing money on their shorts on the day of the stock market’s worst loss.

At the very least, the 1987 stock market fall demonstrated that investing is all about timing. Timing is difficult to master, but if you follow a few simple guidelines, you may still profit handsomely from an ill-timed trade.

Avoiding Margin Has Its Benefits

What happens if a trader is a poor timer? Is it possible for traders who are bad-timers to win in the forex market, where ultra-high leverage and stop-driven price movement frequently cause margin calls?

Yes, it is correct.

Even the best traders in the world, such as market guru Jim Rogers, can still succeed. Rogers—and his famous gold short trade—deserves to be studied in greater depth. When gold prices soared to new highs in 1980 as a result of double-digit inflation and geopolitical upheaval, Rogers grew convinced that the yellow metal market was becoming irrational. He understood that, like other parabolic markets, gold’s surge could not be sustained indefinitely. Regrettably, Rogers was an early adopter of the trade, as is so frequently the case with him. He sold gold short at roughly $675 an ounce as the price proceeded to surge above $800. Most traders would have been unable to resist such price volatility in their position, but Rogers, a keen market observer, realized that history was on his side and was able to not only stay on but also profit, eventually covering the short near $400 per ounce.

What was the secret to Rogers’ success, other than his brilliant analytics and steely resolve? In his transaction, he didn’t employ any leverage. Rogers avoided being at the mercy of the market by not using leverage, allowing him to liquidate his position whenever he wanted rather than when a margin call drove him out of the transaction. Rogers was able to not only stay in the trade but also add to it at higher levels by not using leverage on his position, resulting in a superior total blended pricing.

The Way To Go Is Slow And Low

The gold trading of Rogers has a lot of lessons for currency traders. Experienced traders are used to getting stopped out or having their margin called on a profitable position. Trading is a difficult profession since time is difficult to perfect. Rogers supplied himself with a significantly bigger margin for error by using little or no leverage, and hence did not need to be correct to the penny in order to collect massive gains. Currency traders who are unable to time the market effectively would benefit from following his technique and deleveraging. Success in FX trading is built on the premise that “slow and low is the way to go,” much like in cooking. Specifically, traders should start their trades slowly, with tiny amounts of capital, and with the least amount of leverage possible.

Let’s take a look at two traders to better highlight this concept. Both traders start with $10,000 in speculative capital and decide to short the EUR/USD at 1.3000 because they believe it is overvalued. Trader A uses a 50:1 leverage ratio, selling $500,000 worth of EUR/USD short against $10,000 in speculative account equity. Trader A has only 100 points of margin leeway on a regular 1% margin account before being margin called and pushed out of the market. Trader A is out with a big loss if EUR/USD rallies to 1.3100. Trader B, on the other hand, uses a 5:1 leverage ratio and only sells $50,000 EUR/USD short at the 1.3000 level. Trader B is relatively uninjured when the pair rallies to 1.3100, taking only a modest floating loss of $500. They can also add to their short position as the pair rallies to 1.3300, resulting in a superior blended price of 1.3100. Trader B is already profitable if the pair eventually goes down and trades back down to their original entry-level. Both traders engaged in the same transaction. Despite the fact that both were entirely off on their timing, the outcomes could not have been more dissimilar.

There Aren’t Any Stops? There’s A Major Issue!

While Rogers’ method of trading is plainly profitable, it has one major flaw: it does not employ stops. While Rogers’ method of buying value and selling hysteria has proven to be successful over time, it is subject to a catastrophic occurrence that can send prices to unimaginable extremes and wipe out even the most cautious trading strategy. That is why currency traders should look at the methods of Gary Bielfeldt, another market genius. In the 1980s, when interest rates were at record highs of 14 percent, this plain-spoken Midwesterner made a fortune dealing in Treasury bonds.

Once rates reached those levels, Bielfeldt bought Treasury bond futures, believing that such high-interest rates were unsustainable and would not last. Bielfeldt, like Rogers, was not a terrific timer. He began his deal with bonds trading at a price of 63, but they continued to decrease, eventually trading at a price of 56. Bielfeldt, on the other hand, did not allow his defeats to spiral out of control. He simply came to a halt whenever the position shifted half or one point against him. He was stopped several times as bonds cut out a bottom slowly and painfully. Despite losing money repeatedly, he never wavered in his analysis and proceeded to execute the same transaction. When bond prices finally turned around, his strategy paid off, as his longs skyrocketed in value, allowing him to reap returns much in excess of his losses.

Many lessons can be learned from Bielfeldt’s trading strategy for currency traders. Bielfeldt, like Rogers, is a successful trader who struggles with market timing. He would, however, deliberately stop himself rather than nursing losses. What set him apart was his steadfast faith in his analysis, which allowed him to repeatedly enter the same trade, despite the fact that many other traders would have given up and walked away from the profit possibility. Bielfeldt’s cautious approach paid off because he was able to participate in the trade while reducing his losses. This powerful combination of dedication and perseverance is an excellent example for currency traders who want to succeed in trading but can’t time their trades effectively.

A Little Technical Assistance

While both Rogers and Bielfeldt employed fundamental analysis to make their decisions, currency traders can also use technical indicators to assist them trade more efficiently. The relative strength index, or RSI, is one such tool. The RSI analyzes the amount of a currency pair’s recent gains against its recent losses and converts the data into a figure between 0 and 100. Overbought is defined as a value of 70 or more, while oversold is defined as a value of 30 or less. A trader with a strong view of the direction of a particular currency pair would be wise to wait for RSI readings to support their hypothesis. For example, in the chart below, a trader who wished to sell the EUR/USD on the theory that the pair was overvalued would have been considerably more accurate if they waited until the RSI readings dipped below 70, suggesting that the majority of the purchasing momentum had vanished.

Final Thoughts

Although the timing is an important component of effective trading, even if a trader is a bad timer, he or she can still benefit. The secret to success in the currency market is to take smallholdings with minimal leverage so that ill-timed trades have plenty of room to absorb any negative price action. Trading without stops is, without a doubt, never a good idea. That is why even bad-timers should use a methodical technique that keeps trading losses to a minimum while allowing the trader to re-establish the position on a regular basis. Finally, by improving trade entry, even a simple technical indicator like the RSI can make fundamental tactics far more efficient. Some of the world’s most successful traders have demonstrated that you don’t have to have a great time to make money in the markets; but, by employing the tactics outlined above, your chances of success skyrocket.

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