ETF Trading Strategies Mean You Will Have A Plan
November 27, 2009 by Patrick Deaton
Filed under Stock Market
Working to develop quality ETF trading strategies is a good idea for those who are thinking of getting involved in exchange traded funds and trying to make some money through their participation in some sort of trading system. These funds, which are index funds or trusts, can make for great investment vehicles if you’re smart about how you trade within them.
Exchange traded funds also have many similarities to mutual funds in that they are managed in many of the same ways. They also share similarities with stocks in that the securities within them, and the fund overall, is bought and sold much like corporate stocks. Additionally, every ETF tracks one of the big market indexes such as the S&P 500.
Most traders, though, aren’t allowed to participate directly in the ETF, which limits participation to those who are what these funds refer to as “authorized participants.” This means, generally, that the investors are very large institutional types. Small investors, though, can get in on the action by trading through an online system and with relatively little starting capital.
Never, though, just throw in your starting capital without having a sound strategy for trading. There are two broad categories of strategies, fundamental and technical. People who like using technical strategies are really into broad trends as laid down in stock charts and are skilled at timing market movements and then acting on them to either buy, sell or short a stock or portfolio in the ETF.
Most market experts who know anything about trading will tell you that one of the most common technical trading strategies is one that employs what’s called a “head and shoulders” pattern of trading. It’s sometimes known as trend-reversal, and it’s known to be fairly reliable. Basically, you’ll be short selling when prices decline from the second shoulder.
One can then hold the short sell until the price drops down to the point where consolidation and price supports start occurring. It is also effective for letting a strategist know when that strategist should cut his or her loss if the price rises above a certain peak on the stock chart. One way to engage in a less risky stop-loss action is to cut the loss if prices return to the second shoulder’s peak.
What all of this means is that one will be looking at a stock chart — and you will be trading based on stock held in the ETF — over a term of– to 24 days, perhaps. You’ll be looking for a head and two shoulders, meaning a shoulder before the head and a shoulder after the head. It can resemble peaks and valleys but the head will be higher than the two shoulders on either side of it.
Developing good ETF trading strategies is always highly recommended, whether you are using a technical or a fundamental strategy. When going technical, you’ll want to watch the market and its movements very carefully. Look over the stock charts and then try to discern the head and shoulders. If you do this correctly, you can jump in and out of market at the right times, short selling and then making a fair bit of money.
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