Selling High, Buying Low, Moving Fast: Does Active Trading Really Work?

The question of achieving great returns by timing the stock market fascinates me. Ask it in a room full of investing-savvy folks and you’ll get 20 different answers, even though it should be, in theory, a yes or no question. Yes, you can make money on the stock market by timing your trades. You also can climb Mt. Everest blindfolded. In either case, there’s a solid chance things won’t work out the way you want.

Timing factors into all portfolios and retirement accounts. Brokers and financial advisors keep tabs on global markets, policy announcements, economic data, and a slew of other pertinent issues in hopes of making informed decisions. However, this doesn’t equate to timing the market in the way some people try to do with day and active trading. Predicting the lasting economic impact of international policy developments plays a much different role in investing than a simplified version of buying low and selling high.

If you’re either new to the stock market or looking to shake things up and get more active with your investing, there’s a solid chance you’ve thought about how to best time the bulls and bears and make lots of money in a short amount of time. You may even have money with an account manager who claims he or she has the power to beat the market with insider knowledge which helps with timely decision-making. The fact of the matter is no matter who you are, you’d prefer to time your trading well.

So let’s talk about what happens when people try to read the Wall Street tea leaves and look at what tools are needed to make such daring tactics worthwhile. Whether you have an awesome plan for a flurry of trading or you think you can make more by taking personal control of your retirement account, there are a few questions to ask yourself before you start guessing which way the financial winds will blow.

What Are You Working With?

In my eyes, the amount of money you invest has the most influence on your ability to get ahead of market trends. Every single investor has lost money at some point, and the richest ones have usually lost the most. Timing the market involves much higher risk than a patient, long-term approach: while you might be able to win big on occasion, frequent trading can also leave you licking your wounds.

While I don’t like the idea of gambling your money away, I think a sports betting analogy helps with this concept. In case you didn’t know, many people make a living as professional sports bettors. The ones who have the best mathematical models and insight make lots of money and live very well. These same heavy hitters, the richest of the rich, usually aim to win at about a 60% clip. Think about that for a second: the millionaires betting on games at MGM and Bellagio are content losing pretty close to half the time.

With those terms set, the most important detail becomes the amount that gets bet on each game. If you lose two out of every five bets, and it just so happens that you put more money down on the losers than the winners, it doesn’t really matter if you cashed in one more time than you lost – you’re still losing money.

For this reason, gamblers who make a living on sports betting set a limit and apply it to each bet they place. There are exceptions to the rule, of course, but the majority stick to something like 5% of their bankroll. With $1,000 in an account, every game gets no more than $50. As their total winnings go up, so do the amounts played. It’s a simple strategy, but only the smartest, most disciplined gamblers can make it work. (To be very clear, professional gambling isn’t an investment technique I pitch to clients.)

So what does any of this have to do with timing the market, and specifically how much funding an investor should have at his or her disposal? It comes down to risk management. If you elevate your risk by using active trading strategies, you should risk only amounts that your account balance can sustain. You need to have the financial backing needed to take a loss without going bankrupt. Like sports bettors, you have to acknowledge that you won’t hit on every timed trade.

More money allows you to engage in this kind of active trading a lot more freely. If you only have a few thousand dollars, not only will each loss hurt you that much more but the trading fees might well drain your account before you even have a chance to see any earnings. Conversely, if you have millions to invest and enough time to study market trends and keep up with the analytics, you can make more daring moves without too much fear and hesitation. You’ll have the freedom to make a mistake, lose money and still stick to your overall stock trading strategy.

Anyone can invest in stocks, and I encourage everyone to try and make money on the stock market. However, your financial standing and personal goals influence what tactics you can employ. From what I’ve seen, very few people are in the right position to take a shot at timing the market with any sort of regularity.

What Do You Know?

Timing the market means nothing less than predicting the future. When you buy or sell based on your expectations for short-term stock pricing, you focus less on the strength of a company or budding industry and more on singular events and quick bursts of activity.

If this is the game you want to play, I hope you have really good information driving your decisions. If you get excited by something you read in an article posted on a friend’s Facebook feed, then buy a thousand shares without taking a little more time to investigate the company and timing, that’s not timing the market, it’s just a knee-jerk reaction.

Think about the stock market in 2018. The Dow Jones had actually dipped since making historic gains in 2017, and yet there was a sense that it was still booming because there have been so many instances in which the Dow posted triple-digit gains. On each of those days, and for every day in which the market tumbled, experts and analysts scrambled to explain why it happened and then guessed what will happen next. Every time, without fail, some of them got it right and some were way wrong.

We’ve seen a few market corrections since the massive gains of 2017, but nothing that would warrant any type of lasting selloff. Some of the investors who have tried to time a full market regression look sheepish at this point – imagine pulling your money when the Dow was at 23,000 because your data indicated things would settle back toward 21,000. Since then, we’ve consistently hovered between 25,000 and 26,000.

It’s a safe assumption that the market will correct after climbing or falling at a quick clip. But do you know when that will happen? And do you know what the correction will look like? You might have a good guess, but you don’t genuinely know. You can’t predict what events might turn Wall Street on its head and, more importantly, you don’t know how everyone else will react to interest rates, inflation, and data about jobs and sector growth. If selling high and buying low were easy, everybody would be doing it.

This may be the biggest mistake people make when trying to time the market. Investors forget that these company shares don’t exist in a vacuum, and when you see a trend that suggests commodities X, Y and Z are about to take off, other investors could see something entirely different. When the housing bubble burst, it took months for the markets to react appropriately, even as insiders saw what was going on. That movie, The Big Short isn’t exactly a documentary, but it has some relevant insight into how people react in different ways before and after the market does something big.

You could have excellent analytics at your fingertips, but that doesn’t guarantee the prices will do what you want them to. The day you clean house and change all your positions could be the very day a new international trade agreement is signed and the market goes bonkers. I can’t tell you how many times I’ve seen political and economic anomalies throw off people’s best financial intentions.

Are There Better Options?

After mulling over whether or not you have what it takes to make market timing work for you, it’s worth asking yourself why you want to try at all. Once you nail down your real objective, you might discover there are better, more reliable ways to make money on the stock market.

Most of the time, quick money serves as the big motivator; the right trading stock trading strategies will deliver quick earnings that can be reinvested, and in a few short years you’ll be a millionaire. But is that your actual goal, or just the age-old dream of maximum revenue by way of minimal effort? Dreams provide drive and hope, but you have to recognize the difference between an actual goal and something that’s just a fanciful yearning.

If you really want to commit to expedited earnings, making money on the stock market is pretty much the same as visiting a casino. The sports betting analogy from earlier gets truer when you add haste to the equation, and few things bum me out more than watching someone waste hard-earned money on bad financial decisions. If you really want to grow capital and speed up the process, I can suggest a handful of more reliable options:

● Rental property

● Small business investing

● Fix and flip

● Personal lending

These and other alternative investments diversify your assets, turn profits in a comparatively short amount of time, and stay available no matter which way the market is trending. While you could grab 1,000 shares of the next rising tech stock at just the right time, you can also miss by two days and lose a bunch of money. With intelligent alternative investments, you don’t have to deal with that same constraint.

To further clarify the reality of market timing, almost all the research and studies point to the same conclusion: in the long run, people who try to outpace other traders usually end up in the same place. When you buy quality stocks and sit on them, collecting dividends and accruing capital as the market rises, you end up with as much or more in your trading account as more active buyers and sellers.

With the stock market, you take losses from time to time. The more you trade, the more you lose – in the short term. You will hopefully see more gains as well, but increased activity undoubtedly leads to more frequent busts. On the flip side, since the stock market has steadily grown ever since its inception, holding shares for decades offers a better-than-average chance of seeing sizeable profits.

Ask yourself again – do you want to invest responsibly in an effort to live comfortably, or take on substantial risk in hopes of making a lot of money in a short amount of time? You’re allowed to go with the risky option, but you need to understand what you’re doing; you need to know money flows out nearly as often as it comes in with this tactic, and if you make too many bad moves in a row, your financial flexibility becomes severely handicapped.

In case I haven’t made my thinking clear, I advise against timing the market and trading to quickly make money on the stock market. You can still be active and get shares at a good price, but selling at the drop of a hat and moving on to another company that may or may not offer short-term upside doesn’t lead to great financial returns. It’s exciting, just like betting on a football game or buying scratchers, but neither of these options constitutes good money management.

When it comes to investing, practicality almost always trumps activity. Things may  feel static and boring at first, but watching your account balance grow even as the market fluctuates makes up for it. It’s your money and you get to spend it as you see fit, but you’ll be better off if you keep long-term goals at the center of your investment planning. Selling high and buying low at exactly the right moment sounds like a tempting way to make money on the stock market, but it is incredibly hard to pull off consistently. Tried-and-true stock trading strategies do just as well over the long term.

Make it happen!

Taylor & Megan Kovar

The Money Couple