In addition to risk management, timing is the be-all and end-all in trading. You could even say that timing is a kind of risk management, because in many cases it ensures that you get a good price and the probability of winning is very high. Keyword: opportunity-risk ratio.
But what does "correct timing" actually mean? That depends on the direction in which the trade is to take place. If you buy call options, a price close to the lows is certainly very good timing - when trading put options, the highs are a good starting point. In practice, however, it is not very easy to hit them, because in many cases you can only tell that a high has been formed.
How do you recognize highs and lows?
Nevertheless, there are technical set-ups where you can guess a high or a low. On the one hand, this can be the case when strong resistance or support is achieved. Very risk-conscious traders usually wait for a high or low to be confirmed, often with the help of indicators. But because many indicators are lagging, this fact also turns out to be complicated for the right timing.
Nevertheless: Especially with indicators that show the strength of the trend, divergences can point to the formation of such points as shows the following chart of the DAX futures. While the DAX future continued to rise, the RSI indicator was already in a downward trend.
A common set-up to recognize a low is the classic bottom formation in the form of an SKS formation or a double soil. But if you look at the same DAX future, you will see several such formations in the downward trend that started from the last high, but which could not sustain the price each time.
Especially in the trading of products, that require manual risk management, i.e. stops have to be made by yourself, the losses would have been small each time the entry had been close to the lows. If you had pulled the stops (trailing stops), you might not have incurred any losses at all.
Traders who were waiting for resistance to reach 11,800 pts before they got in because they were so wrong Assuming a confirmation, there have definitely been losses, see chart below.
But also in binary options trading, the right timing should prove to be useful, because although the trend was down again, the profit would be ultimately depend on the chosen term. And the better the timing, the more time you would have to stay in the profit zone.
The reverse psychology in timing
According to the chart above good timing isn't too difficult, is it? You buy as close to lows or highs as possible. However, the fact is that buying near the lows or highs requires overcoming psychological hurdles. Because often the trend is still near a low towards the downside. In order to achieve really good timing, you have to act against the trend - and that obviously speaks against the idea of the desired confirmation.
However, if you confirm this confirmation - whether through indicators or reaching resistance (see 11,800 pts.) - waived, so one takes a higher risk. This is fundamentally a wrong assumption, which suggests our inverted understanding of risk.
The risk is of course higher if everyone has already got on, so you are actually jumping on the train too late. In the meantime, the risk near the lows is lower, because you can hedge yourself very close, because lows are also important support.
If these lows are triggered again, losses, as already indicated above, can be kept low. Better timing than starting after confirmation therefore always represents a better opportunity-risk ratio.
This psychological hurdle has to be overcome when it comes to achieving good timing. The hurdle is based only on our misunderstanding of risk. But how should you understand it differently if it is almost never communicated?
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Conclusion: Psychology does it
As so often, psychology plays also plays a big role in the right timing. Above all, our understanding of risk situations is crucial for whether we assess the situation correctly. However, the risk situation can only be correctly assessed if the consequences of the respective entrances are known.
In this case, an essential question would be: "What would be the loss for me if I buy here - and which if I buy get in at this point? " This question can usually already be answered by analyzing past courses. The CRV is often better near the lows than elsewhere. With this knowledge, the first step to the right timing is done.