by Amanda Harvey
Timing the trade, relative to identifying when to enter and exit a position, is a vital component of successful trading. In the fast-paced world of stock options trading, a matter of minutes can make the difference between a win and a loss.
Using Trade Timing to Identify Entry and Exit Points
When seeking to use market timing in the sense of determining when the best time is to enter and exit a specific trade, there are various tools that a trader can use.
Moving averages are the basis of a lot of analysis applied to timing the trade. It is a popular conception that when the market has risen above either a 50- or 200-day moving average, it can be considered bullish. The opposite view is also held, in that a market dropping below the 50- or 200-day moving average may constitute a bearish market. A typical market timing view would be that this trend is likely to continue, making it a viable opportunity to follow the trend.
Timing the trade can also be done by ascertaining an entry point by using technical analysis to examine support and resistance levels in order to identify a breakout or a pullback. A breakout is often followed by a pullback to support levels, and the beginning of the reverse movement following the reaching of support can provide an indication of a suitable point for entering a trade.
When to Trade
Another aspect of timing the trade is to consider the actual schedule of the normal market trading day, and when is the most potentially beneficial time during the day to enter or exit trades. Many traders prefer to conduct the majority of their trading during the morning session occurring after the market opening. It is often suggested that the middle of the day, being a quieter period, is a less productive time for trading.
This can also be taken further to consider factors such as the seasonal influence in certain market sectors, and the beliefs that are frequently held about which months are most beneficial for trading. While there is a saying that a trader would be well advised to “sell in May and go away,” with the belief that the typically volatile markets between May and October are best avoided, a trader should consider their own particular trading style and approach. Volatility can provide opportunity when understood and managed, and there is no rule that applies to all people at all times.
Pitfalls to Avoid
There are potential errors involving timing the trade which need to be avoided, and these errors are usually a result of allowing emotions to overrule logic.
Rather than waiting for the precise moment to enter a trade, based on analysis, a trader may be driven by impatience or a fear of missing out, into entering the trade too early. Doing so means paying a higher premium than they would have if they had waited, and cutting into the profit that could have been made.
Another timing mistake is to exit a trade too early, and this is usually a fear-driven decision, too. Rather than allowing the trade to realize its full potential, the trader pulls out sooner, afraid of risking the gain that has already been made.
On the other end of the spectrum is the error of staying in a trade too long – usually as a result of greed. The trader is tempted to wait for the profit rise just a little more, rather than exiting with a moderate gain in accordance with the plan that has been made for entry and exit points. This often results in a loss of the profit that could have been taken, and even the investment capital.
Whatever techniques and strategies you choose to apply in timing the trade, it is important to remember that, while there are never any guarantees of success, creating and implementing a well-structured plan and applying the tools that best suit your approach offers the best possibility of realizing a profit, time after time.