|ETF's, For Newer Traders looking for a system of trading. Why ETF's? |
I use a very simple system for making profitable trades using Etf's as the vehicle.
There are many ways to approach trading them such as sector Etf trades, Swing trading
which are trades generally lasting from a partial day to weeks at times.
Let's go over a simple rules first. (1.) Do not hold etf's as a long term investment. They
do what I call as (slide). Let me give you an example. Lets say the Dow is at 10,000
and a certain etf is at 10.00. If the dow goes down to 9,000 then lets say the etf went
to 9.00. Lets say the Dow then went back up to 10,000, you would expect the etf would
be back at 10.00 in relation but if will most likely be around 9.50. Another words because
of nightly readjustments and other factors, the etf will not follow the Index in the way you
Ok. now to the systerm. Now remember, this is at it's most simple and basic. If you apply
this you should make a nice profit. You can make money on market up days and even
more important, you can also make money on down days. There are some more technical
aspects which I will add in later posts but will just give you the simple basics and am sure
you will do quite well for yourselves. For the most part we will call this Swing trading Etf's.
We will be discussing Etf's which have an opposing Etf also. Plus we will be using leveraged
etf's in order to capitalize the Market moves.
Some examples of long and short leveraged etfs are as follows.
Bull 3x Type of Etf Short 3x
FAS FINANCIAL FAZ
TNA SM. CAPS TZA
BGU LG. CAPS BGZ
CZM CHINA CZI
EDC EMERG MRKTS EDZ
ERX ENERGY ERY
LBJ LATIN AMER LHB
MWJ MID CAPS MWN
DRN REAL ESTATE DRV
TYH TECH TYP
There are many more etf''s, but these are the ones I use the most because of thier leverage.
Rule 2. Do not use the indicators on the etf chart itself for you trading decisions. The etf
merely follows it's index.
For example, If you like Lrg Caps, then you may want to trade BGU & BGZ, the 3x
leveraged lg cap etf's and use the Dow or the S&P 500 as the index to make your decisions
from. SSO & SDS are double leveraged etf's that track the S&P 500, so when trading
those, you could use the SPY chart and it's indicators for your buy and sell signals.
The following will be an example using just one pair of etf's but will work on all as long as
you are using the Correlating index as your guide for entry and exits.
For swing trading the etf's I will use longer time frame charts, Hourly or even daily.
For daytrading the etf's then of course you would use shorter time frames such as 5 min.
On my Index chart, (SPY) or ($DJI), I personally have 3 identical charts up, each with
different time frames so that I can see at a glance when the market is turning. You can
practice simply by pulling up a dow chart for 6 months or a year on a daily time frame,
with a SMA of 10 or 20 and you will see the major times in which you would want to
enter or exit trades for longer term trades.
I also have a chart of BGU and BGZ up, which are the short and long 3x Lg cap etf's.
Using the $DJI or the SPY with Simple Moving Averages (SMA) of 10, 20 & 50 on the
chart, plus Macd, Vol, and I also use Stochastics and RSI (relative strength indicator)
on the Index chart. You can play with the time frames on the indicators until they give
you the indications you prefer.
So, very simply put, when the Index indicates that the market is about to change from
an uptrend to a down trend, I would sell my BGU shares and Buy BGZ shares. Then
when the trend changes according to the chart of the Index, back to an uptrend I
would sell the BGZ shares and repurchase the BGU shares.
When the market is in the trasition, and you think it will change but not sure, you can
keep your long position and just add to your short position for example until you are
convinced of the move.
Using different time frames and looking at charts in many different time frames will show
you the many possibilities using this basic and simple method. On swing trades you
can get a better idea of how sure you are of the move by checking the macd, stochastics
and rsi on the index chart in several different time frames. I use 5 min, for daytrades
and usually hourly and daily for swing trades.
You can also keep some shares on the opposing side of the move as a hedge incase
your decision is incorrect.
I will try and go over some of the smaller details in a future post, as there are many ways
to use etf's in trading. Sector analysis is one of the more lucrative ways to play etf's,
but for now, get your charts warmed up and set up your indicators and see where you
would have liked to of entered and exited the trades.
You will find that sometimes the trade lasted for weeks. Other times only hours. I also
trade up to 4 or 5 different etf pairs at the same time.
I know this was very simplistic, but it has worked for me and I am sure with a little effort
that it can do quite well for you also.
I have started a Forum, SHADOW ISLAND. Feel free to stop by and read about news and info you won't get from the main stream media. We trade ETF;s Gold and silver miners and small caps including otcbb, nyse, nasdaq, amex, Under 10.00 per share. Rules not firm. This is still America and we believe in freedom of
speech. No cursing please. http://www.thelion.com/bin/forum.cgi?tf=shadow_island