by Amanda Harvey
Introduction
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.
In Conclusion
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.