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Discretionary vs Mechanical Market Timing Strategies

4 min read
Discretionary vs Mechanical Market Timing Strategies

Investors Or Traders?

Those who use the stock market to grow their assets have two choices. They can either be investors, which means they are “buy-and-hold” for the long term. Or, they are traders who try to use the ups and downs inherent in free markets to profit.

Buy-and-hold investors have much to worry about. Are they buying in at high prices? When they are ready to retire, will the markets be in a bear market? Obviously those who planned to retire in the years 2000 through 2002 faced a great dilemma. Aggressive buy-and-holders who were invested in Nasdaq stocks, had lost 70-80% of their capital. Even cautious S&P investors lost 50%.

Market timers, who are actually traders usually using mutual funds as their investment vehicle of choice, recognize these pitfalls. Their goal is never to give back much capital.

Yes, there are sometimes small losses in timing, especially at market tops and bottoms, but if you are trading trends (and historically the markets are in trends more than they are not) you will never take large losses to capital as you will exit immediately if the trend changes.

And… you will make your big profits from the inevitable long term trends when they occur.

Two Kinds Of Market Timers

Market timers, trading all trends, are the most successful over time. But even in market timing, there are two ways to determine your trades.

Discretionary timers depend on the sum total of their market knowledge to make decisions. Whether it be market analysis, a multitude of indicators, gut feeling, current or even potential future news events, hot tips, etc.

Discretionary trades are subjective. They can be changed and second guessed. There are no absolute guarantees that each individual trade is based reality and is not colored by any personal bias.

Mechanical timers, which use timing strategies based on an objective and automated set of rules, avoid the emotional biases inherent in discretionary trading.

They follow a set of rules to get them into, and out of, the markets. They know that some trades will not be successful, but they also know that they will always be in for the big trades. The ones that make the money and over time make them successful timers.

Mechanical systems make life much easier by “removing” the emotional aspect.

Based on Price

Mechanical timing strategies are based on “price.” There is no other information in the stock market that is absolutely correct at all times.

Price tells all. Price is always correct.

It may seem a bit boring using a mechanical timing strategy. After all, where is the fun, the emotional highs, that many traders thrive on.

But let’s get one thing straight. Mechanical timing strategies, which use price to determine trends, are not about fun. They are not about emotion and in fact they are designed to eliminate emotion.

Mechanical trading strategies are about “making money.” Pure and simple.

They are about winning.

Following The Emotional Crowd

In fact, the entire stock market moves up and down because of millions of investors depending, for the most part, on emotional decisions. Fear and greed. That is why volume spikes near the tops of rallies, and again near to bottoms of corrections. Everyone is jumping on board.

There may be comfort in following the emotional crowd, but there is seldom profit.

Mechanical timing strategies, using “price” to determine buy and sell signals, actually “use” the emotional ups and downs of the market to make money.

The rallies and corrections are going to happen, so if we use price to tell us when they are happening, as trend traders we just jump on board and let the market take us along for our profits.


Discretionary traders sometimes have big winners. Toss a coin enough times and it always comes up heads eventually. But the only certain way to be successful for the long haul in the markets is to follow a “non-emotional” trading strategy and to always “stick-to-the-plan.”

There is no second guessing. There are no worries. We know the strategies work over any two or three year period and that can be proved with historical data going back a hundred years or more.

Trend followers know that the markets are “in” trends most of the time. They also know that at tops and bottoms there will be times of whipsaws where small losses are endured.

But trend traders who understand the logic of their strategies, are excited at these times. Why? Because those times of sideways non-trending markets are the precursors of the next big trend.

Be sure to stick to the trading strategies. No one knows what will happen tomorrow, but trend traders “know” they will beat the markets and make great profits over time.

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