Why ETFs Should Be Part Of Your Portfolio

The demand for exchange traded funds (ETF’s) grows each year. There are almost 1,000
ETFs available to trade covering almost any asset class imaginable. Some of the larger ETFs are offered by ProShares, IShares, and the SPDRs. There are many ways a sound stock trading systems could incorporate the benefits of ETFs.

There are many reasons for the increased popularity of exchange traded funds. The primary attraction may be that ETFs are considered less risky than individual equities. Because ETFs are a basket of underlying securities the business risk of single stock exposure is reduced. There’s no chance of corporate wrongdoing affecting an ETF like it would an individual stock.

Other benefits of investing with ETF’s are:

• The market can be traded on both the long and short side. This expands the opportunity for profits because an investor can gain from a rising and a declining market.

• Some ETF’s are leveraged. More aggressive traders like the idea of increased leverage. There are now ETF’s with not just double the added leverage, but also triple.

• The capability to trade multiple markets is possible. Oil, gold, silver are some of the possible commodity ETFs. World markets are accessible – country specific investments like: Brazil, China, Japan, etc.

• The currency market is available with many ETFs -- there is likely an ETF for all major world currencies.

• Option trading --just as with stocks the same option strategies can be applied to ETFs.

• Portfolio diversification is simple given the multitude of asset classes, sectors, countries, and currencies represented by exchange traded funds.

• ETFs are not only popular with the investing public, but also with hedge fund managers and day traders. One of the reasons, besides being great trading vehicles, is that they are useful as hedging vehicles.. Hedging with ETFs can protect the profits in a portfolio and it can be accomplished inexpensively.

As with single stocks, technical analysis strategies are suitable to ETFs. It’s possible to successfully use trend following indicators and oscillators. Charting the price movement is no different than graphing a stock. The major index ETFs move very smoothly and are great vehicles to trade. An active trader could make a good living trading only index ETFs.

One warning – note the volume on each individual exchange traded fund. Many like the SPY, QQQQ, DUG, and DIG have lots of volume. Some of the more obscure, like some sector ETFs are thinly traded and should be avoided.

Back Testing Trading Strategies

Back-testing trading strategies is something traders should do when building trading systems. A strategy usually starts with an impression that is coded into a formula. Back-testing that formula will demonstrate the viability of the initial idea. The goal for back-testing is to gauge the effectiveness of your idea. Here are a few tips about retrieving realistic results.

Stay away from over optimization. Optimizing data is manipulating the indicators within the strategy to gain the best results for the time period being tested. Optimizing could also be testing a specific strategy on specific equities .

Don’t kid yourself and test your long strategy on only a screaming bull market and then conclude that your method is the best ever invented. Be practical.

Test over many time frames. Try your strategy every year for the last 5 years and average the results. During that 5 year period is likely found a down market or a long period of consolidation — that will put a little realism into the results.

Back-test the strategy over a broad index of stocks — for example, the Russell 3000 contains 98% of the US equity market and is a good index to use for testing.

You don’t necessarily need a big winning percentage for success — watch the profit and loss ratio. I’ve seen some strategies have a 40% winning average and be extremely profitable. The reason — the losses are small compared to the gains.

Building and back-testing trading strategies isn’t for everyone. Often it’s easier to subscribe to a system that will provide nightly buy and sell signals. It all depends on how much time you want to devoteto trading.

For nerdy people like me it’s enjoyable to test an idea — usually something I’ve seen on a chart. Most of the time my brilliant ideas don’t produce, but how would I know if I didn’t back-test them?

Trending And Trading Markets – Discovering The Correct Indicators For Each

A trending market is one where prices move firmly in one direction, either up or down. The clearest way to visualize this price pattern is by drawing a line that follows the slope of the prices. Another stamp of a trending market is the steady move to new highs and higher lows. Conversely, in a down trending market prices would be making lower lows and lower highs.

Trading markets don’t make new highs. There is no noticeable, persistent, move in either direction. Prices tend to ping back and forth near old highs and then fall to prior lows. Tracing this type of price action would reveal a series of peaks and valleys.

Trending markets require lagging indicators. Moving averages (simple, weighted, exponential) are in this category as is the MACD (it also has a leading component, too). These indicators will manage you in a trend as long as the trend remains intact. Lagging indicators are useless in a trading market -- moving averages tend to flatten in a sideways market and offer no useful information.

There will always be periods of consolidation in the markets to frustrate traders. The Relative Strength Index (RSI), Stochastics Oscillator, and Williams %R are some of the common indicators found in most charting software. These indicators alternate between oversold and overbought and are usually restricted by an upper and lower range.

Trading markets can be problematic to trade. Despite the use of oscillators there will be an increased frequency of trading signals, both buys and sells. Many of the signals will be false and whipsaws are very likely.

One of the best ways to harness a trading market is to discover the support and resistance region on the chart. The odds for success can also be increased by taking only the most overbought and oversold signals.

Planning to participate in a trading market can be very frustrating. The more trading one does the more we find our comfort levels. There is nothing wrong with taking a little trading vacation and waiting for market conditions that mesh with your style.

I hope you’ve found a few ideas that will work for you. Good luck with your trading

Build Your Trading System By Spotting The Superior Instruments To Trade

The top stocks to trade have an average monthly volume of greater than or equal to 500,000 shares. The price should be greater or equal to $20 per share. This insures that you have some institutional interest. That is what moves the price.

Stocks with less volume are a hazard, in my opinion. You might get lucky, but you won't be consistently happy trading these issues.

Try and implement a trading system that looks for stocks with a monthly average volume >= 500,000 shares and a share price >= $20.

Your scan criteria should look something like this:

MA(Volume, 20) >= 500000

Use a simple moving average, MA. 20 is the number of trading days in a month: 5 days per week x 4 weeks = 20)

Close >= 20

This builds your universe of trading candidates.

Now that you have your universe of candidates you should weed out some of the choices.

Find the stocks that move fluidly in one direction. Avoid those that chop all over the screen. Flag the smooth movers and put the selections in a list by themselves. Give it a title that describes the contents of the list, for example, My Trading Candidates. Observe these stocks for potential entry points.

The selection process is critical to successfully making money in the markets. It's the first step in a successful stock trading system!

Good luck with your trading!