Beware Lure of Market Timing

Market-timing strategies attempt to outperform a buy-and-hold strategy by anticipating the future direction of a market. They can work, but mostly they don’t.

First, such strategies are based on the belief that future security prices are predictable, typically through the use of technical indicators, such as trend following or momentum, that are computed from the past prices.

There are numerous papers that confirm the superior performance of momentum strategies across markets and around the globe. Studies have also found that trend-following strategies have enhanced risk-adjusted returns, producing higher Sharpe ratios.

Also, since some trend-following trading rules would have helped investors avoid some of the massive losses experienced during the two severe bear markets that occurred during the first decade of 2000s, the popularity of such strategies has increased.

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