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Timing the Financial Markets

 

 

There has been some misunderstanding in the financial community about the use of the word “time” or “timing” in discussing this subject. Obviously, the fund manager can control shifts between common stocks and cash or fixed-dollar assets in an effort to judge the timing of general market movements, and any measure of the fund manager’s skill should reflect his skill in making such judgements. The fund manager, however, does not control the time at which funds are received or at which they must be disbursed, and the measure should not reflect this timing.

There is an easy way to make the measurement of the rate of return insensitive to the timing of receipts and disbursals. In the BAI report, this measure has the possibly confusing name, “time-weighted rate of return.” Although the name may be confusing, the principle is not.

The time-weighted rate of return is logically equivalent to the rate of return on mutual fund shares which are bought and redeemed at net asset value per share. The investor who purchases shares in a mutual fund can measure the rate of return on his investment by knowing the price he paid, the value of payments received, and the price of the shares at the end of the period in question. He does not need to know the time or amount of new investments in the fund by other investors who bought shares or the time or amount of disbursals from the fund to shareowners who redeemed their shares. The individual investor’s rate of return is totally insensitive to those injections of capital into or withdrawals of capital from the fund.

It will not be surprising to any reader who has persisted to this point that the BAI report recommends that performance must take account not only of the rate of return on assets but also of the risk to which the investor has been subject.

It is undesirable or unwise for all investors to subject themselves to the same degree of risk, and therefore not all investors should expect the same rate of return. The elderly widow whose primary objective is the protection of her assets from loss cannot expect as high a return as the more venturesome young physician whose primary objective is to maximize the value of his holdings 25 years in the future. If one knew only the rates of return on the widow’s and the physician’s respective portfolios, one would not be in a position to judge the skill with which their investment advisers had done their work.

 

In a recent interview with our Snr. Markets Analyst at Axis Financial Source, Ltd., I asked him a simple question. What made a successful trader in the Forex market? He told me that it could be summed up in three basic rules:

Rule #1 Make a trading plan
Rule #2 Execute the plan
Rule #3 Under no circumstances change the plan midstream

Our Snr. Markets Analyst holds an MBA in International Finance, is a member of the The Professional Risk Managers’ International Association (PRMIA) and has traded and analyzed the financial markets for over 15 years.

He went on to say that you always hear the experts talking about the trillions of dollars being traded in the Forex market. What they don’t tell you is that 90% of all traders loose their money. It’s a zero sum game. For every winner, there’s a lot more people loosing their money and the market is unforgiving. He told me that from his experience, the primary reason most traders loose their funds is uncertainty about what they’re doing. So, you’re going to need to be better organized and better prepared than the other guy. Do your due diligence and put together a trading strategy that you feel comfortable with and set it in stone. You must approach your trading like a business, not a hobby.

Once your trading plan is established, it’s vital that you know your system like the back of your hand. You obtain this discipline by demo trading. Demo trade your system until it becomes so second nature, you can do it in your sleep. Then do it again and again. The added experience and knowledge will give you the certainty to perform your trading system by the numbers no matter what the market throws at you. Don’t be in such a hurry to loose your money. Then, when you pull the trigger, let the trade either hit your stop loss, target or break even point. In our experience, this allows your overall trading model the room to breath, as we say. The percentages involved with your strategy need time to pan out and it’s the long haul you should be concerned about anyway.

Above all, Do not over leverage. Using proper money management is at least, if not more important than your trading system. Never risk more than 3% of your account on any one trade. This way you can loose 6 out of 10 trades and still make money. Remember, this is a numbers game. So, if you’re trading a ,000 account and are confident with your system you can loose 60% of the time and still be in profit. It’s not uncommon to encounter a four trade losing streak. Experienced traders have similar or even longer loosing streaks. The reason they’re successful is because they use low leverage.

Our Managed Signal Account generally only risks 2% of the account per trade and we will only approach 3% if we are nicely in profit for the month. Please note that it gets exponentially more difficult to recuperate your account as losses mount and raising your leverage when you’re negative is the fast track to major losses that are unrecoverable. This is where your trading discipline comes into play that was forged from sufficient demo trading. Strict adherence to prudent risk management will keep you in the game.
Our Snr. Markets Analyst could not overstress that you need to have realistic expectations about your trading. Think of it as the difference between risk capital and gambling money. It’s not like going to a Vegas casino and if you view your trading in any way like you’re gambling, the odds are great that you too will be flying home broke.

Which brings us to the matter of the use of robots. In our opinion, they don’t work. If they did, no one would be trading live and we’d all be living large. Remember, it’s a zero sum game, so, why would anyone sell you their money making machine for 0 when they could be using it themselves to get rich?

Finally, our Snr. Markets Analyst feels that unless your using a news-type trading strategy, specifically designed to trade during financial news, that it’s wise to stay out of the market during these times. It’s been his experience that trading during days with major financial news holds more danger than benefit.

Good Trading!

If you are curious about how to become a capital markets analyst, your first step should be to understand more about the job.This will help you to decide whether this career is right for you and, if you think it is, to make a plan for achieving your professional goals and getting the job you want.

As a capital markets analyst you will need to have an extensive amount of knowledge on such areas as finances, financial markets and risk management products, and strong skills in the areas of analytics, negotiation and presentation. You can gain this knowledge through a bachelor’s or master’s degree in accounting, business, finance or a related field, but negotiation skills may be more innate. If you are not good at negotiating, this might not be the right career choice for you.

Once you have the education from an accredited, reputable institution and some experience from internships and/or entry-level jobs you may begin working as a capital markets analyst.

Your duties will include analyzing financing and financial risk management proposals, assessing financial products and structures, assisting in projects and presentations, evaluating financial risk management products including derivatives, helping clients in different capital market transactions and financing structures, managing bank relationships and negotiating finance-related agreements.

Additional skills in collecting and documenting business requirements, creating process and data flow maps or diagrams and organizing financial information will serve you well in this career. Knowledge in all areas of the global capital market is also a necessity, including such areas as compliance, custody, finance, OTC derivatives, prime brokerage, risk, settlements and trade. It will take a long time to complete the education and training, and you will likely have to start at the bottom once you find work at a financial firm, but with hard work and smart financial analysis your hard work will pay off. Capital markets analysts can easily earn ,000 annually, if not more with experience and merit.

As a financial markets analyst you will be able to find work in cities and towns across the world, particularly in major metropolitan cities. If you are drawn to numbers and finance this might be the job for you.

Institutions offering quality Accounting Programs include University of Phoenix, Strayer University, DeVry University, Brown Mackie College and Everest College.