Market Timing Strategies

Market Timing Strategies | (Setups, Regime Filters & Backtest)

What are Market Timing Strategies? Plenty of investors try to time the market. Most are unsuccessful due to a number of reasons. Thus, most investors should not time the market. However, most of the failures can be attributed to a few reasons. In this article, we look at some elements that we believe are required for successful market timing.

At the end of the article, we give you several Stock market timing systems and strategies we have backtested that can be used for aspiring market timers. (and work well).

Key Takeaways:

  • Market timing strategies involve using quantitative methods to make trading more mechanical and less influenced by subjective factors.
  • The 200-day moving average strategy is effective for stocks, showing a lower maximum drawdown compared to buy and hold, despite similar CAGR.
  • Market timing is risky and not recommended for most investors due to the difficulty in predicting market movements and the potential for significant underperformance.
  • Long-term investment and a diversified portfolio are emphasized over attempting to time the market.
  • Effective market timing requires dedication to a strategy, the ability to ignore market noise, and readiness to face inevitable periods of underperformance.

What are market timing strategies?

Should You Time the Market

Market timing strategies involve attempting to predict an asset’s future movement. However, predicting the future can be challenging and is subject to many subjective factors.

To avoid this problem, we prefer timing models built using quantitative methods to make trading more mechanical and less discretionary. The rules for buying and selling are based on previously specified criteria, and personal opinions and predictions are not included in the model (obviously). We have written about mechanical trading strategies vs. discretionary trading strategies earlier.

The key to successfully trading a timing model is to closely follow the system and your strategy closely, assuming you have a proper backtested market timing system. Even if you have an outstanding timing model, it will be useless unless you commit your money and follow ALL the signals. You don’t know beforehand which signal will be good or bad. Unfortunately, many abandon or override their system sooner or later, primarily due to trading biases.

Giving the model enough time to work is essential to achieve the best results. Short-term fluctuations can be unpredictable, so focusing on the long-term results of carefully chosen strategies/allocations and the model’s trading rules is crucial. If you stick to your plan and trading rules, you will likely be rewarded in the long run (again, assuming you have a valid strategy or system).

Let’s give you an example of a market timing system:

Market timing strategy example and backtest

An example of a market timing strategy is the 200-day moving average (a very simple system):

Market timing Trading Rules


This strategy has performed well for stocks over many decades. Here is the return (log chart) of investing 100 000 in 1960 and reinvesting and compounding:

best market timers

The 200-day moving average strategy has displayed decent results:

  • There have been 187 trades since 1960.
  • The Compound Annual Growth Rate (CAGR) is 6.7%, while the CAGR of buy and hold is 7.1% (excluding reinvested dividends).
  • There is an average gain of 2.5% per trade.
  • The maximum drawdown is 28%, compared to the 56% drawdown with buy and hold.

The 200-day moving average strategy has nearly kept pace with the S&P 500 while experiencing significantly lower drawdowns and spending significantly less time in the market. However, one potential drawback is encountering tax liabilities due to non-deferred capital gains.

Market timing Definition

Market timing refers to the practice of trying to predict when to buy or sell investments in financial markets in order to make a profit. It’s like trying to guess the best moment to jump into a game or step out of it.

People who try market timing believe they can predict when prices will go up or down, but it’s really tricky and can be risky. It’s a bit like trying to predict the weather – sometimes you might get it right, but often you’ll be wrong. Experts often say it’s better to focus on long-term investing and not try to time the market because it’s hard to do consistently well.

Is stock market timing strategies a good idea?

Yes, market timing strategies might be a good idea for a few, but for most investors, it’s not. After reading this article, you’ll understand that market timing requires specific prerequisites to succeed. Regrettably, most market timers fail.

The risk of market timing is doing it wrong and thus underperforming massively. This is the potential cost of market timing.

Attempting to time the market can be problematic if you attempt it for a period and then abandon it due to discouragement, opting for something more agreeable (the grass is always greener on the other side). For example, you decide to overrule the signal because you are bearish. But when you overrule a strategy, you can forget the backtested results. A system can’t backtest overrules, obviously!

Following your emotions may cause you to abandon your timing strategy at the most inopportune moment, such as when your investments are performing poorly, which inevitably happens.

Can you commit to a long-term strategy and remain dedicated to it? Will you adhere to the system, despite your sentiments and external pressure? Can you resist impulsive actions and disregard the abundance of “hot tips” you encounter regularly?

Time in the market beats timing the market

Time in the market beats timing the market, which is a guiding principle for many investors. Instead of trying to predict short-term fluctuations and perfectly time buying and selling decisions, this philosophy emphasizes the importance of staying invested over the long term.

By remaining in the market consistently, investors benefit from the power of compounding returns and have a better chance of capturing overall market growth. They are also less likely to make costly mistakes that may limit their compounding.

While attempting to time the market may yield short-term gains, it often leads to missed opportunities and increased risk. In contrast, a patient approach focused on long-term growth tends to result in more stable and reliable returns over time.

Are you independent and have self-confidence?

As indicated above, you don’t want to overrule the strategy, system, or model.

Investing holds few certainties, but one thing is sure: regardless of your investment performance, someone else will have recently outperformed you and appears to have struck gold. Investors are always bragging on social media, which might make you feel like an idiot.

Anxious investors constantly look over their shoulders for someone who has discovered the “one true path” to wealth. However, this path is a myth, and nervous investors are not adept at timing the market. Trading involves inevitable losses and drawdowns.

Successful investors know their objectives, establish a strategy to achieve them, and remain committed to that strategy regardless of others’ actions. If you aim to increase your assets by 10 percent annually, and a timing system allows you to accomplish that, can you be content even if others are earning 12 percent, 15 percent, or even 20 percent? If so, you may possess the necessary attributes to excel as a market timer.

Remember, very few go on to beat the S&P 500 over the long run. The minority has managed over 10% for over a decade.

You are guaranteed to underperform from time to time

It may seem obvious, but how often people overlook this fact is surprising:

A timing system is not intended to generate identical returns as an untimed market. Achieving market outperformance is gratifying, but your satisfaction may be eclipsed by the anger or disappointment you feel when your portfolio underperforms, or your timing system results in a loss. This is particularly true when you are convinced that the signal generated by your system is incorrect.

Your system is not perfect and not a holy grail

The media’s primary criticism of timing is its imperfection. When you experience underperformance and losing trades, media critiques can undermine your confidence. Media often states that timing necessitates being right twice – when you buy and when you sell – as opposed to a buy-and-hold approach, in which being right only once when you buy is sufficient.

Typically, your system will get you into or out of the market “too soon” or “too late” to capture the tops and bottoms. If your goal is to exit at the absolute top and enter at the absolute bottom, timing is certain to disappoint you.

If this disappointment will drive you crazy, think twice before pursuing a timing strategy because the perceived timing errors will weaken or demolish your willingness to follow the plan. Rather than striving for perfection, aim to tilt the odds in your favor. And a solid timing strategy can accomplish that.

A good plan is often ruined by the desire to make the perfect plan.

Can market timers ignore the massive impact and noise from news?

The popular press appears to have a collective blind spot concerning timing, almost unanimously denouncing market timers. The mutual fund and brokerage industries widely share this view. Perhaps for good reason, since most market timers end up underperforming.

Can you sell your investments when everyone else is buying or already profiting? Can you repurchase when your friends, colleagues, the media, and even your own intuition are telling you that it is a foolish notion?

Do you procrastinate?

Certain individuals tend to worry, overthink, and postpone making choices even when certain about the course of action. Such people are improbable to succeed as market timers, as successful timing necessitates prompt action to enter and exit markets.

One of the most apparent facts about timing (yet commonly ignored) is that when your friends, colleagues, intuition, and experts concur on what you should do, it is already too late for you to capitalize on the maximum potential. If you typically take significant time to make decisions, Stock market timing may not be suitable for you, and you are better off buying and holding.

Do you trust mechanical trading strategies and systems?

Timing financial markets is already an incredibly challenging task, without the added pressure of making predictions or feeling obligated to choose which smart economists or experienced analysts are correct when their forecasts and conclusions conflict.

If you rely on subjective factors to make final decisions, you will never be confident about what you should do at any given moment, leading to anxiety and procrastination. Consequently, you’ll have an unreliable system.

Instead, depend on trend-following systems that rely mainly on trends influenced by actual market prices. There’s nothing speculative about prices; they mirror the actions of buyers and sellers, making them an extremely dependable gauge of the market’s direction.

One or a few trades mean nothing

The vast majority of individual trades will not significantly impact your long-term outcomes. If you find yourself fixating on each trade and excessively worrying about its implications, it indicates that you are not suited to be a successful market timer.

Focusing excessively on every trade is a guaranteed method to drive yourself insane and will not improve your results.

Only use systems that fit your personality

The ideal strategy for you will align with your time horizon, consider your emotional needs, and remain within your risk tolerance and capacity for change. There are short-term systems that trade frequently, long-term systems that trade infrequently, and intermediate-term systems that typically execute two to six trades annually.

No group has an inherent return advantage over the others over extended periods, but practical and emotional differences are significant.

If you want to closely mirror the market’s performance, utilize short-term systems that react rapidly to today’s highly volatile market fluctuations. However, short-term systems necessitate numerous trades, and each trade can have potential tax consequences unless you are investing in a tax-sheltered account. The volume of trades requires substantial attention, produces significant paperwork, and can test the patience of many mutual funds that may decline accounts from very active timers.

Conversely, if you strongly dislike whipsaws, opt for long-term systems, but this will sometimes require waiting for a 20 percent or more move before buying or selling. For the best compromise, consider using intermediate-term systems, which are likely to be accepted by most mutual funds and are not overly demanding emotionally. We have made a personality test for traders.

Timing the market vs time in the market

“Timing the market” means buying and selling investments at just the right moments to make the most profit. It’s like trying to predict when a roller coaster will go up or down so you can get the best ride.

“Time in the market” means staying invested in the market for a long time, even if there are ups and downs along the way. It’s like going on a long journey on that roller coaster without worrying too much about the small bumps because you know the overall ride will be exciting.

Timing the market can be really tricky because it’s hard to predict when prices will go up or down. Even experts sometimes get it wrong! But if you focus on time in the market, by staying invested for years, you can benefit from the overall growth of the market over time, and you’re less likely to get stressed out by trying to guess the best moment to buy or sell. It’s like playing the long game and letting your money grow steadily over time.

Use many strategies and systems that complement each other

The most efficient system in the past may not be a strong performer in the future, and vice versa. Thus, you should not rely on a single high-flying timing system that has performed well recently, similar to how you should not chase recent performance when selecting mutual funds or asset classes.

In reality, “superstar” timing models do not exist; they are a myth. Good performance in one year has no bearing on performance in the next year – none at all. This is one of the most difficult truths for investors to accept, but it is accurate. As a result, we believe that your best option is to locate several robust timing models and stick to them.

You need to diversify. You should have systems for different time frames and asset classes. Different asset classes are important for a market timer:

Dollar cost averaging vs timing the market

Dollar cost averaging and timing the market are two different ways people approach investing.

With dollar cost averaging, you invest a fixed amount of money at regular intervals, like every month. This helps you buy more shares when prices are low and fewer shares when prices are high. It’s like buying a little bit of something regularly, no matter the price.

Timing the market is when you try to buy or sell investments based on predicting when the market will go up or down. It’s like guessing the best time to buy something, hoping to buy low and sell high.

Dollar cost averaging is often seen as a safer and more reliable strategy because it doesn’t rely on predicting the future, which can be really hard. It’s like steadily saving for something you want, instead of trying to guess when it’ll be cheapest.

Market Timers and the importance of Asset allocation

Incorporate numerous assets or asset classes that fluctuate at varying times. Incorporate international diversification, whether you invest in equities, bonds, or a combination of both.

Just as you are unaware of which timing model will perform exceptionally in a specific quarter or year, you also do not know which asset class will exceed expectations and which will underperform.

Prepare for tough times

Implement your strategies without hesitation and without exception. If you do only one thing right and everything else wrong, ensure that this is the one thing you do correctly. This is the most crucial key of all.

You can devise the most exceptional portfolio in investing history, but it will be of no use unless you invest your money in it. The greatest timing models are of no use unless you apply them. Therefore, do whatever is necessary to accomplish it.

Currency market timing

Currency market timing is about trying to figure out the best time to buy or sell currencies based on what’s happening in the world. It’s like trying to catch a wave when surfing – you have to watch, wait, and choose your moment carefully. Although currency market timing is possible it is not easy to do. You need to thoroughly backtest and analyse your market timing models before hand so you can evaluate the risk involved.

Market timing systems and strategies need time to work out

Anticipate the obstacles you are likely to encounter and focus on the potential rewards of your strategy. Receiving the benefits of success will be straightforward.

However, you will never reach the finish line unless you can overcome the hurdles along the way. Understand the extent of temporary losses you may face with your approach and ensure you are prepared to accept them.

For example, in the early 1970s, buy-and-hold investors in the Standard & Poor’s 500 Index suffered a 39 percent loss in one year. Even timing can be unpleasant. To sum it up, do not anticipate any timing system to be a magic solution.

Use both buy and hold, asset allocation, and Stock market timing

In the long run, if you have chosen a strategy thoughtfully and adhere to the discipline, you should be suitably compensated.

However, what is the appropriate length of time to wait? There are two factors to consider. The first is your psychology. Do you typically undertake long-term projects or strategies and are comfortable knowing that any payoff will require patience? If so, you may be an ideal candidate for market timing.

Conversely, if you quickly judge the success or failure of something you initiate and require instant gratification, you may struggle to be a successful market timer.

The second factor is statistical and historical data. Arm yourself (or have your manager do so) with your proposed investment’s past statistical performance, either real or hypothetical. Determine the largest drawdown over the longest period for which you have data. Find out how long it took to return to break-even.

Here’s a challenging example of the incredible patience required of investors: in 1973 and 1974, the S&P 500 decreased by 44.9 percent, and it took 66 months for some investors just to break even. If you are uncertain whether you will stick with a strategy through the longest historical drawdown for which you have data, do not attempt that strategy. Also, the biggest drawdown is yet to come.

Forex market timing

Forex market timing refers to the strategic execution of trades within the foreign exchange market based on specific timeframes, economic indicators, or market conditions. Traders analyze various factors such as economic news releases, trading sessions overlap, and historical patterns to identify opportune moments to enter or exit positions. Effective timing can maximize profit potential and minimize risk exposure in the dynamic and decentralized forex market.

Market timing might involve underperformance – don’t put all your eggs in one basket

By employing both buy-and-hold and market timing strategies, you will most likely have two uncorrelated approaches that will produce different outcomes in any given period.

Over extended periods, thoughtfully selected investments in comparable assets may yield comparable returns with both buy-and-hold and market timing.

However, in the interim, the average of the two methods may result in reduced losses, lower risk, and, most significantly, less anxiety than either market timing or buy-and-hold alone. This combination may be more attractive to many individuals than the ups and downs of each approach independently.

Market timing strategies and systems that work

We have covered many Stock market timing systems on this blog since its inception.

The Death Cross trading strategy has proved to signal bad times ahead, while the Golden Cross strategy works well for when to buy.

The promising name of the Supertrend Indicator has also worked well on long time frames, as well as the Coppock Curve and the Fabian Timing Model.

If you want to enter after a recession or at the end of a bear market, we found two good potential trading strategies: the bottom timing trading strategy and the end of bear market trading strategy.

Buy And Hold Vs. Market Timing Stocks

Market Timing vs. Other Strategies

Buy and hold vs. market timing is widely debated in the stock market. There are numerous articles on the internet arguing the futility of timing long-term investments. We decided to do some tests ourselves by removing just a few observations from the datasets to see what happens to the long-term compounding:

Buy and hold vs. market timing shows that you increase the risk of getting mediocre returns if you get it wrong. Market timing is a pointless exercise if you are a long-term buy-and-hold investor. Removing just a few of the best and worst days in the price series changes the result dramatically.

Why is wrong market timing influencing the end result so much?

Because of the compounding effect, this is what Warren Buffett calls Snowballing. If you get it right, you become a genius. If you get it wrong, you risk looking like a fool.

Is compunding the eight wonder?

Albert Einstein is famous for saying that compounding is the eighth wonder. But is he correct?

Yes, to a certain extent, he is correct. But Mark Spitznagel made some exciting calculations in his latest book called Safe Haven investing:

Spitznagel says multiplicative compounding is the most destructive force in the universe. In real life, the problem is that you can only traverse one path, not the average. If you don’t pick the right path, you might ruin your compounding ability for years and decades to come. If you get it wrong, the compounding effect is not to your advantage.

We recently showed why arithmetic and geometric averages differ in trading and investing using Monte Carlo simulation. If you don’t understand Mark Spitznagel’s reasoning, we recommend reading that article.

Is buy and hold a good strategy? Better than market timing?

If you want to participate in society’s wealth creation, you have to invest in stocks. This has proved very successful for over a century, although some countries, like China, Germany, and Russia, went bust along the way (and others).

But even if your country does not default, you can end up with mediocre returns (even penniless) if you are unlucky with the sequence of returns. For example, those who invested in 2000 had no returns for over a decade. Many young investors most likely have never experienced a real bear market. Your past experience in stocks heavily influences your decisions later.

The best advice is probably to invest in stocks and forget about it. Women are better investors than men because they do it like this: they save, invest, and forget about it. They are not trying to be innovative; thus, women beat most of those who do market timing.

You have no control over the sequence of returns, but you can control your behavior.

Market timing: trading vs. investing

Keep in mind that this article doesn’t discuss trading. Trading is something utterly different than buy and hold investing. Trading involves exploring and finding market inefficiencies and market edges to turn over your capital frequently. Trading is labor intensive – far away from sitting on your ass doing nothing.

Buy and hold vs. market timing: a backtest

We downloaded daily bars for the cash index of the S&P 500 back to 1960. The cash index doesn’t include reinvested dividends, and thus, the CAGR is slightly lower than if you, for example, had invested in a total return ETF or fund (SPY was the first one in 1993).

We did two backtests:

One backtest removed the ten best days of the complete dataset (replacing them with zero performance that day), and the other backtest removed the ten worst days of the dataset. Remember that this is ten days out of 15 577 days – 0.064% of the sample size.

Let’s first check the annual result of buy and hold over the whole period:

Ten thousand invested in 1960 was worth 782 000 at the end of October 2021 (with no dividends reinvested).

If we remove the ten best days, the value of the investment drops to 350,000. If we do the opposite and remove the ten worst days, the portfolio value increases to 2.24 million.

What an enormous difference!

The annual returns, the CAGR, are like this:

  • Buy and hold: 7.4% (no dividend reinvestment)
  • Remove the ten best days: 6%
  • Remove the ten worst days: 9.3%

Even small changes in annual returns can lead to wildly different results in your retirement fund. In the battle between buy-and-hold and market timing, this is an advantage of buy-and-hold.

If we look at the graph, the differences are even starker:

Market Timing Strategies
Market Timing Strategies

The graph above uses a linear scale and shows buy and hold (blue line), missing the ten best days (red line), and avoiding the ten worst days (yellow line).

What happens if we switch to logarithmic charting? (Read here for an explanation of linear vs. logarithmic charts and scale.) A logarithmic scale shows the percentage moves and is much more suitable for charting the longer the time horizon:

Buy and hold vs market timing
Buy and hold vs market timing

Let’s make a new backtest:

We remove the best and worst days over the whole period (one day out of 15 577 – 0.0064% of the dataset). The worst day was the 19th of October 1987, and the best was the 13th of October 2008 (in the middle of the financial crisis). We have provided a list of the best and worst days further down.

When we use a logarithmic scale, we get the following equity curve:

What happens when you miss the best and worst days in the stock market
What happens when you miss the best and worst days in the stock market

The CAGR is like this:

  • Buy and hold: 7.4% (no dividend reinvestment)
  • Remove the single best day: 7.2%
  • Remove the single worst day: 7.8%

Why do the results differ so much?

When you remove the worst and best days, you start compounding at a higher and lower plateau. This will greatly determine your future retirement fund.

This is why Mark Spitznagel is correct in saying compounding might be the most destructive force in the universe. Most private investors perform poorly in the markets, and the main reason is that they get it wrong. And when they get it wrong, compounding has a detrimental effect.

Warren Buffett is not a relevant benchmark. He has admitted that he was lucky when he started investing: he started in the 1950s when the valuation multiples were extremely low after a whole generation was still pessimistic after the Depression. He was lucky with his sequence of returns!

We are not saying Buffett is a poor investor. He is not; he is most likely very intelligent and rational. But it’s impossible to remove luck and randomness from any performance.

The ten best days in the S&P 500 1960 – today

The table below contains the dates of the ten best days from 1960 until today:

11/24/20086.47 %
11/13/20086.92 %
4/6/20207.03 %
3/23/20097.07 %
10/21/19879.09 %
3/13/20209.28 %
3/24/20209.38 %
10/28/200810.78 %
10/13/200811.58 %

As you can see, six of the ten best days happened during the financial crisis in 2008/09! If you want to understand why a bear market has so many days where it goes up dramatically, please read our article about the anatomy of a bear market (2000 -2003). In times of crisis and uncertainty, the markets tend to overreact, both up and down. This is why it is so extremely difficult to time the market.

The ten worst days in the S&P 500 1960 – today

Let’s remove the ten worst days from our time series.

The table below shows the dates of the ten worst days:

10/19/1987-20.46 %
3/16/2020-11.98 %
3/12/2020-9.51 %
10/15/2008-9.03 %
12/1/2008-8.92 %
9/29/2008-8.80 %
10/26/1987-8.27 %
10/9/2008-7.61 %
3/9/2020-7.59 %
10/27/1997-6.86 %

Buy and hold vs market timing: conclusion

Our very simple tests of buy and hold vs. market timing show the dramatic consequences of long-term compounding by leaving out 0.064% or less of the data in our price series. Admittedly, we removed the most significant days, but it shows how it influences the long-term results.


Why do most investors fail at stock market timing?

Most investors fail at stock market timing because markets are, for the most part, random. They also fail at market timing due to several reasons, including the difficulty of accurately predicting market movements, emotional biases, and the tendency to abandon timing strategies prematurely.

Are there market timing systems and strategies that have been backtested?

Yes, stock market timing systems and strategies have been backtested for profitability and performance metrics. These include the 200-day moving average strategy, the Coppock Curve strategy, the Fabian Timing Model, Sy Harding’s Seasonal Timing Strategy, and more.

Is there a perfect market timing system?

No market timing system is perfect. Timing systems may not capture market tops and bottoms accurately, and there is always a risk of underperformance. The key is to tilt the odds in your favor and stick to a well-thought-out strategy. Also, market timing may not be suitable for all investors. It requires specific prerequisites, including discipline and the ability to commit to a long-term strategy.

Why is emotional bias a significant factor in market timing failure?

Emotional bias plays a significant role in market timing failure because investors often make decisions based on fear or greed rather than rational analysis. Impulsive actions that deviate from the chosen timing strategy can ultimately result in poor investment outcomes.

What are some common mistakes investors make when attempting market timing?

Some common mistakes investors make when attempting market timing include overtrading, chasing past performance, ignoring transaction costs and taxes, and failing to stick to a consistent strategy. These mistakes can undermine the effectiveness of market timing efforts and lead to suboptimal results.

Why is market timing considered futile for long-term investors?

Market timing is deemed futile for long-term investors because even slight errors in timing, such as missing a few of the best or worst days, can dramatically affect long-term compounding, leading to mediocre returns. also, most long term investors have no backtested plan to “prove” their decisions.

How does compounding affect investment outcomes?

Compounding, often referred to as the eighth wonder by Albert Einstein, has a snowballing effect. If market timing decisions are incorrect, the compounding effect can lead to significant setbacks in wealth accumulation over years and decades.

What are the backtest results comparing buy and hold with market timing?

The backtest results indicate that removing the ten best days reduces the portfolio value, while removing the ten worst days increases it. Annual returns for buy and hold are compared with market timing scenarios.

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