Timing Based Investment Decision Making

I consider timing, rather than a company's fundamentals (earnings, margins, debt, financial ratios, etc.), as the most important element in the investment decision making process. When investing in a great and fundamentally sound company, the wrong timing or entry point can still turn a good investment idea into a painful loss.

Many professional investors and traders will view the market and individual securities through three different time frames before deciding to put capital to work. Analyzing the market in these time frames can help avoid losses and maximize profits. The following methodology can be used to improve your investment decision making process, however it should be revised as need to reflect your personal investing and trading goals.

Start your market or security analysis by looking at price charts with a long-term time frame. Many investors and will use the monthly chart for this high level of analysis. The following long range view can help determine if the market as a whole is moving higher or is in correction (use an index for this type of review). It's best to invest when the market is moving higher in a solid trend. When the market is in correction it's wise to move to a cash heavy allocation until the positive trend continues. This is due to the fact that most stocks move in the same direction as the market, rearguards of individual fundamentals.

When viewing a broad market ETF in this time frame, I would consider the market in a major correction when price falls below the 20 period moving average.

monthly trend chart
monthly trend chart

After you have determined that the market as a whole is in an uptrend you can drill down into an intermediate time frame. I like to move from the monthly charts to a weekly chart for this level of trend analysis. In this view you will be able to determine if the stock is overbought, oversold or is close to it's mean based on technical indicators. This is also a good time frame for finding price levels that may serve as resistance or support. Regardless of the benefits of using a intermediate chart, I spend most of my time analyzing price action in short-term time frames.

weekly trend chart
weekly trend chart

The lowest level of time that I will analyze the price action of a security is at the daily level, this is my personal short-term time frame. More often that not, day and swing traders will start their long-term trend analysis at the daily charts or lower (hourly, etc.). However, like I said, we are looking for good entry points on our investments not trade set ups. I like to look at my daily charts with a 6 month time frame, as I've shown below.

daily trend chart
daily trend chart

The 6 month daily chart provides me with the last bit of information that I need to complete my personal investment decision making process. When analyzing the price action at this time frame, I look for positive price indicators such as price in relation to the 20 and 200 day moving averages. I also pay close attention to the Bollinger bands to gauge recent volatility and momentum.

Attempting to time the market perfectly is a fool's errand. Analyzing the market and individual securities in a variety of time frames can help you choose better entry points for your investments. Deciding to include time into your investment decision making process will dramatically improve your chances of making wise investments.

My Favorite Yahoo Finance Chart Setup

In the past 10 years I have used a variety of charting tools (TradeStation, NinjaTrader, etc.). I loved NinjaTrader; however I need to be able to access my charts from a web browser and not have to rely on a local program installed on a hard drive. NinjaTrader has tons of 3rd party indicators that notify you of trade opportunities, there are some really awesome ones.

The NinjaTrader platform also includes a bunch of trade management features, but I'm not a day trader and really don't need any of them. In the past year or so Yahoo Finance has spent some time upgrading their charting to a level that's, in my opinion, good enough for the average investor. Yahoo's finance charts don't offer a lot in terms of technical indicators, however I rather have a simple and easy to read chart over one that is filled with tons of difficult to read indicators.

My Yahoo Finance Chart Parameters

I make a conscious avoid analysis paralysis and set up my Yahoo charts with the following parameters:

Time Frames: 10yr (monthly), 1yr (daily), 6mo (daily), 3mo (daily)

Price Graph: Candlestick

Moving Averages (Simple): 20 and 200

Bollinger Bands: Period (20), Standard Deviation (2)

Moving Average Convergence Divergence: Slow (48), Fast (22), Smoothing (9)

My Favorite Yahoo Chart Setup
My Favorite Yahoo Chart Setup

As you can see the chart is rather simple, however it displays enough information to help determine wise buy and sell points for the average investor. The best traders will use hard rules to determine when to enter and exit a position, this helps remove the emotions of fear and greed from their decision making process.

Additionally, the best investors will use similar rules (not as hard) to help determine the right time to buy a security. This Yahoo finance chart setup helps me find the best time to enter a position. In my next post I will describe the rules I use when making decisions based on these chart parameters.