How’s Your Timing?

Whether you are a trader or investor, one thing can certainly help your profit curve: good timing. If you’re trading options, then timing is critical.

Like most traders, getting my timing right has been challenging. It seems I am often early when going long and often right on time with the shorts.

Bear markets can be very aggressive with the selling, and it happens quickly. One of my rules for consistent trading success has been a real game changer in getting better entrances on the trade: I attempt to only buy bearish trades on up days and bullish trades on down days. Challenge yourself to wait for these times, and you will see the difference it can make.

Another broader revelation was reviewing the patterns from month to month in the S&P500. Simply reviewing a monthly return chart of the S&P500 since 1964 gives you an idea of what the month is likely to return.

With the exception of September, things look pretty good. Getting a broad perspective of the markets is a solid framework before digging into quarterly and intra-month moves. Depending on the average duration of a trade, you may, like me, trade from days to weeks. Looking at what happens within the timeframe of a month may be more appealing to your educated outlook.

Some time ago, I read an interesting piece by Tom Bowley on the average returns of stocks in the S&P500 over the last 70 years. There was a regular pattern of up at certain times, and down at other times. Monthly option expiration moves the markets in a regular pattern.

In a bull market, securities rise into option expiration and sell off after. Remember: the week after options expiration is historically bad!

I have observed the opposite often occurs in a bear market. Logic dictates that I use this research to my advantage. Breaking down the research led me to build the following charts:

YEARLY S&P 500 TRADING PATTERN SINCE 1950

I further broke down the research for monthly figures into the following simple chart, which I post right next to my computer for easy and quick reference. It has been amazingly helpful in improving my timing!

MONTHLY S&P500 TRADING PATTERN SINCE 1950 (11 days bearish, 17-20 bullish)

Knowing that markets generally sell off just after monthly option expiration (between the 19^th-25^th) and then rebound (between the 26^th-6^th) can really help your timing. Waiting for an opportune time for entry into your bullish position can be as simple as waiting for the bearish time of the month and setting an alert for a pullback entry point.

Using better entrance timing can help your profits tremendously over time. Consider the charts above to improve your bottom line in your trading business.

Enuf said.