Choosing an investment strategy can be overwhelming as there are so many to pick from. However, almost every strategy boils down to two main approaches: timing the market and time in the market. These strategies are regularly practised across the crypto and stock market. This article will unpack both investment styles and how they contrast with each other.
What is market timing?
Market timing is an investing strategy that involves predicting the movement of the market to make a short-term profit, generally within a range of a day to a week. Successful market timing can be highly profitable but, consistently predicting market movements can be very difficult. Market timing requires daily attention to the markets and expected price changes, it can be draining for the average investor.
Important To Remember
Regardless of how experienced a trader is, or how much analysis and due diligence they do, there will always be unpredictable circumstances that can impact market trends and negate solid strategies.
Cryptocurrency is no stranger to market volatility. Volatile investment markets have opportunities for larger profit but also possess higher risk when timed incorrectly. There will always be days when even the most experienced traders sustain losses. Therefore, effective day traders must also be well versed in mitigating losses.
An active investor implementing a market timing strategy aims to ride the waves of the market by predicting good entry and exit points. Scalping is the technical term for opening and closing positions with small price changes in a very short time frame.
An example of market timing
The price of Bitcoin is $20,000. Jacob believes that the price will go up and purchases 1 BTC. Within the same hour, BTC rises to $20,200. Jacob sells the 1 BTC and profits $200 (assuming no trading fees). Jacob could earn larger profits if he purchased more BTC, but could also potentially expose himself to larger losses.
Things to consider
Professional day traders and swing traders practice market timing strategies and deeply understand technical analysis to help them make informed decisions. Technical analysis breaks down market trends and provides insight for the investor. It is a great tool to have when attempting to time the market but is not guaranteed to be profitable, even if the investor has a sound understanding of it.
It’s always a good idea to consider trading fees when making trades. Each trade, whether buying or selling, incurs a trading fee. These fees may seem small, but they become significant when executing larger trades, or a high volume of smaller trades.
What does time in the market mean?
Most investors understand that consistently and accurately timing the market is difficult and aren’t willing to take the risk. Time in the market takes a more passive approach to investing, focusing on an asset’s long-term potential. Time in the market has the potential to make large profits with minimal risk.
Investors using this approach buy and hold assets until their value reaches a price target, generally over a much longer time frame, for example, three to five years. This style of investing is also called “buy and hold investing”.
Dollar-cost averaging (DCA) is an investing technique in line with the investing style of time in the market. Dollar-cost averaging involves investing fixed amounts at consistent intervals without taking the price into account. This passive approach is great for beginner investors with little understanding of good entry positions that are looking for minimal risk.
A real-world example of time in the market
In 2009, a Norwegian man named Kristoffer Koch bought 5,000 BTC for a total of $29 USD. Four years later, in 2013, Kristoffer sold 1,000 BTC, earning him $196,000 USD.
Things to consider
Traders who adopt this strategy must be prepared not to take profits for long periods. If you invest at the market’s peak and it crashes, it may take a couple of years for you to see profits. That’s why it is always important only to invest as much as you can afford to lose.
Time in the market is a more conservative approach to investing, however, that doesn’t make this style of investing risk-free. Choosing assets with strong fundamentals is important, using techniques like fundamental analysis. Assets without strong fundamentals are unlikely to perform well over time, thus making this style of investing redundant.
Timing the market vs time in the market
Timing the market and time in the market are two distinct investing styles. Timing the market takes a very active approach to investing. Investors focus on charts and trends daily, trying to determine whether it is a good time to buy or sell. Time in the market is much more passive. This approach centres around the asset itself, financial research and whether it has strong fundamentals that will contribute to an increase in value in the future.
One way to look at these different investment strategies is to compare them to selling wine. A winemaker could sell a freshly made bottle of wine straight away for a small sum of money (timing the market). Or they could age the wine for a very long time and sell it for a much larger profit (time in the market).
Overall, time in the market is often considered a stronger investment strategy for the average investor, especially those who don’t have much experience in crypto markets. It takes a tremendous amount of discipline and time to have a small chance of being successful at timing the market. Even experienced traders often have difficulty timing the market consistently. Time in the market is less risky and more likely to deliver positive results consistently, but it can take a very long time to be profitable.
Did You Know?
It is estimated that 90% of day traders lose money. Beginner traders who dive right into day trading without learning market fundamentals are likely to fall into this pool.
Some investors use both strategies separately, and some use a hybrid strategy. An investor who uses a hybrid strategy utilises both technical and fundamental analysis. These investors might accumulate assets when the price is low, based on an understanding of market cycles, and then sell them at a higher price further down the market cycle. A hybrid strategy could be regarded as a mid-term strategy, which might last several months to a year.
Pros and cons
Timing the market
- It’s possible to make profits in a very short amount of time
- Investors can return large profits
- Can be applied to any asset
- High risk and a low success rate
- Can be time-consuming
- Usually higher fees and entry costs
Time in the market
- Low risk and has a high success rate
- Very time efficient
- Much lower entry costs
- Often takes a very long time to return a good profit
- Cannot be applied to any asset
For many investors, time in the market beats timing the market. Timing the market consistently is incredibly difficult and it also takes a tremendous amount of energy and discipline. Whereas, time in the market requires less effort and produces more consistent outcomes. Whatever investment style you choose, it is important to conduct thorough research. Otherwise, it is no different from gambling.