Profitable ETF Trading Strategies – Appreciating Anchors

Ken Long asked:

The Nobel prize winning work of Kahneman and Tversky featured an extensive examination of the biases we routinely commit which drive our thinking away from the purely rational economic man theorized by traditional economics.

One of the more important biases they examined was the phenomenon of anchoring. We anchor when we place a higher value or attach more meaning to a price than is warranted by facts. We see that for prices which act differently near round numbers which seem to have an almost magnetic effect. Price action near round numbers is different than that of normal price, and with no better explanation than the effect of psychology.

Among the anchors that I pay attention to are the 52 week high and low, the 30 day high and low, and the 10 day high and low. Each of these price ranges can be thought of in terms of a trading range. By using a technical indicator like Williams %R or by indexing the range on a scale of 0-100, we can easily identify ranges where price can be considered overbought and oversold. It is in these ranges that anchoring seems to have an effect and which allow us to frame trades that have favorable reward:risk ratios.

The academic literature finds this anchoring effect with the 52 week high and low, but I haven’t found any scholarly papers on the 10 day range. The 30 day time period has been studied, but more from a momentum perspective than for potential anchoring bias. It actually has an inverse predictive quality (30 day strength predicts underperformance for the next 30 days)

I find that by simply using the 52 week range and the 10 day range and looking for the anchoring effect at extreme overbought and oversold I get plenty of short term trading opportunities for trades that last 1-3 days and which produce a respectable system quality number (as defined by Dr Van Tharp)

Review the Williams %R indicator or use Excel to establish an index range of 1-100 for the time period you are examining to get an edge in your trading.


Profitable ETF Trading Strategies – Understanding ETF Volatility

Ken Long asked:

There are many different useful definitions of the concept of volatility. For the purposes of this essay I just want to consider volatility in a non-technical way, and that is as the amount of variation in returns around the mean, or the average.
In any bundle of returns from a trading system, you will always be able to calculate the average return. If most of the returns are tightly clustered around the average you would normally consider this to be predictable and reliable and low volatility. If individual returns were widely scattered above and below the average, you would normally consider this to be unreliable, risky and high volatility.
That is the general sense of volatility that I want to consider in this essay.
Now, I want to consider some lessons learned concerning volatility in exchange traded funds within your trading practice.
ETFs are much less volatile than individual large cap stocks. This is true even for ETFs whose components holdings are all large cap stocks. Even the big, mature companies in the Dow Jones Industrial 30 index are much more volatile than the composite ETF that holds them. This is ETF trading symbol DIA.
One of the things you get with lower volatility ETFs is the ability to engineer your position sizes more carefully because ETFs have less volatility and also tend to be more range bound. You are much more likely to have an extraordinary event in individual stock which includes the possibility of a runaway winner whereas ETFs are more likely to give you long regular cyclic waves of winners and losers.
In addition to ETFs having lower average volatility, they also have a lower standard deviation in general than the individual stocks that make up the index. What this means is that the amount of surprise you are subject to is generally less on both the upside and downside. This is true regardless of whether you’re ETF is focusing on shore conservative companies were smaller cap growth.
Of course we want to be careful in overestimating the usefulness of this information. We want to remember that even low volatility ETFs Possibility of large at first moves off of overnight surprise news.
So ETFs may isolate you from some individual company risk but at the cost of giving up the opportunity for wildly explosive moves in your favor by surprise. For many traders, this is an excellent trade-off if you are looking for regular normal returns.?


Profitable ETF Trading Strategies – How to Find a Good Mastermind Trading Group

Ken Long asked:

In a previous article I described some of the ideal qualities of a Mastermind for traders and the reasons why the social connections and personal support are so important fr the lonely profession of trading. Maintaining emotional balance and energy are so important in this career. How do you go about finding a Mastermind that fits you?

There are a number of different ways and what’s more important than how you find it is the sense of fit you get once you are in it. If your trading style is to focus closely on a small group of symbols, you may have some luck with going to a yahoo or MSN stock room to look for similarly interested traders who hang out in the discussion boards.

You will be quickly able to determine who the genuine professional traders are. Chances are though, that the low signal to noise ratio of the discussion boards will chase away the dedicated traders. But, if you do find someone or some group of people genuinely focused on real trading, you can invite them to a discussion area or a Mastermind forum somewhere else where, by invitation only, quality traders can gather to refine their plans.

Most stock gurus (in the positive sense) will have discussion areas on their websites, which is nice, because you know that the members there will share a common approach to the markets, and may be able to help you reduce your learning curve, particularly if the forums have been there for a while and have some archives or help files to share.

There are a number of financial advice or traders websites where many different kinds of traders will generally gather to discuss a wide array of trading ideas, systems, books, websites and so forth. These will generally not be focused enough for you to materially improve your trading, although you may find some people who are kindred spirits and may be interested in sharing some collaborative space elsewhere to mutually support the groups trading styles.

Elite Trader or ETFconnect are typical of these kinds of sites, with Elite Trader being very eclectic and ETFconnect having the added quality of being much more narrowly focused on Exchange Traded Funds.

Local investment clubs, library interest groups or members of a church with an interest in investing offer low risk ways of finding like minded individuals that may fit nicely with your age and personality type. The only downside may be that of interests diverge you may introduce an uncomfortable element into a close personal relationship.

If all else fails you will find many hits going through Google or yahoo searches, but you will have to sort through a lot of noise these days to find a good group of actual traders.

Far more important than where you find a community of like minded traders is the commitment you will make to each others’ professional development and emotional support, but it is true that you will have to start somewhere finding people who are also looking for a mastermind.

A good mastermind will go a long way towards improving your individual performance as a trader, and so it is worth the effort at searching, finding and participating in it.


Profitable ETF Trading Strategies – Focusing on a Single Stock Or ETF

Ken Long asked:

One of the regular traders in our trading mastermind has made a successful practice of focusing on just a few stocks and ETF’s in his short-term trading strategy. The rest of us have seen him develop an almost uncanny ability to anticipate his targets reactions to news, behavior at certain important price levels and generally stay in tune with the changing price action a day-to-day basis.

We asked him to go through some different ideas of what he looks for in order to develop his mastery and he was happy to share the following considerations with us. Take a look at these and you may discover that they can help you improve your trading as well.

Our master of focused trading examines the following things about but stocks and ETF’s he specializes in:
the relationship of the stock to the sector it is a part of the relationship of the sector to the market overall the targets relative volatility with respect to changing market conditions the targets relative volatility in terms of its own historical patterns and norms the targets behavior upon release of major news items and earnings events how the target behaves in response to economic news the relationship between the targets of volume and subsequent price action the relationship between volatility in subsequent gains Where the target is in the business cycle and in the equity curve cycle average performance statistics over various periods of time such as three days, 10 days, 30 days, quarters and year-to-date and 12 month trailing. Important price levels for support and resistance and major turning points in the past, especially those dealing with high volumes how the target behaves when the market is crashing or breaking out wildly to the upside whether the target is considered a defensive sector a growth sector or middle-of-the-road average statistics of overnight gaps and subsequent follow-through is the relationship between price action as it approaches popular moving averages such as the 20, 50, and 200 day moving averages any identifiable patterns based on time of day, day of week any patterns of price action that relate to options expiration dates pair trade possibilities between the target and other members of its business sector or the market in general whether or not the target is likely to be affected by regional news or currency events the strength of the correlation between the target and its business sector and regional ETF

He listed more than just these, but you can see from this already rapidly growing list just how much there is to know about any particular target. Knowing these details and having internalized them in order to be able to act quickly is an edge that it is not easy to offset.

Our mastermind has seen firsthand evidence of the power of focus, and so we suggest it as a strategy for you to consider in your trading.


Profitable ETF Trading Strategies – Understand Your Trader Quality Number

Ken Long asked:

The system quality number that is taught by the International Institute of Trading Mastery is a very powerful way of calculating a single number that describes the relative quality of a particular system, given a set of trading results that are typical for that system. It is a methodology that allows you to compare average results with typical volatility over a statistically significant data set to determine if there is a quantitative and qualitative difference between two systems.

The system quality number is a powerful idea as far as it goes. Many traders, however, discover that the actual results of the system they propose to trade come in different than those suggested by the back test. One of the important differences between back testing in forward testing with real money is the human factor of the trader himself and his affect on system performance.
Sometimes the traders’ actions add value to a system. Frequently the traders’ actions take away value. The reasons for this can be numerous and varied and usually there is a combination of reasons why the trader degrades the performance of a particular system. It is normal for an inexperienced trader to overrule the specific system rules that add the most value to the new system.
An example of this would be to refuse to take an entry signals because of a particular belief in where the market is going to go next. This will normally occur when you see the system rules putting you into trades that don’t make sense to your intuition. It may be the very counter-intuitive nature of the system that adds value to the results. If your psychology is aligned with that of the masses, then you will tend to overrule the system precisely when it is taking advantage of mass psychology.
As a result of this phenomenon, it is useful to think of a trader quality number which incorporates the system quality number as modified by the traders’ actions.? Only by taking meticulous notes of when and where the trader deviates from the system’s rules can we determine if in fact he is adding or subtracting value. By examining the results from numerous examples of trader intervention, we can determine if it’s a good idea for the trader to have discretion or not when executing the system.
It takes an incredible strength of will and character to take a look at the results of your own interventions and then act in a professional manner based on your analysis. If you can do that however, you have the fortitude and character to be a great trader.
Know your trader?quality number as well as your system quality number and let that be your guide.


Is selling stradle option on SPDR exchange traded fund(SPY) a good strategy?

raj k asked:

I am an individual investor who is currently using options on exchange traded funds for capital growth.I sell both put and call options on SPY (S&P500 index) close to the current market price. I also buy protective puts.I generally sell options two months out to maximise my return on investment. Can you advise me if it is a good and safe strategy?


ETF Trading Strategies – The Secrets to a Successful Trade

Dany Capello asked:

There has been many books written and a lot has been said about ETF trading in general. There are also a number of books that talk about ETF trading strategies but there is probably no one complete book that describes ETF trading from A to Z. The knowledge however you get from these books can help you become a better ETF trader by helping you hone your ETF trading strategies. You also get to learn a lot especially from the mistakes from others.

If you want to come up with a good solid and winning ETF trading strategies you need to first have a bit of experience in the ETF market. It will also do a great deal of good if you have some one or somebody who can teach you the about ETF trading strategies. The basis of a good ETF trading strategy is that it takes many things including good information into consideration.

Learning from other people’s experience is good because it will save you a lot of money, and time when it comes to developing a winning strategy. The best way to learn is from stories of other people’s success as well as their mistakes. Your job is to go and use what they tell you to develop your own unique trading style which can be adapted to the every changing ETF trading market.

The ETF market is never the same its always changing and its really hard to predict even for seasoned traders who have spent their life in the market. The trends however will tell you a little about what you can expect and how you should tailor your ETF trading strategies to make maximum profit. So in a way your strategy needs to be able to quickly be adjusted to the changing market.

People who have been ETF traders for a few years begin to have their own style of trading. Some styles my seem a bit unique while others will appear to look great. However these styles are based on the trader’s own unique experiences and knowledge. Yes in the ETF market you can experience extreme lows and extreme highs but this is something even the pros experience, you however need to make a profit in the long run in order to be successful.

The ETF trading strategies you come up with needs to be designed in a way that makes it so flexible that you can would it to your taste and requirements. You also need to be able to accomplish this as soon as possible before the market takes another turn.

People who have traded and have made alto of money often fail later on because they were not able to keep up with the changing market. So you also need to find a way to compensate for that. The market will change as it has always changed but your sense of the market should keep you ahead of the game. So come up with a strategy that you can really use and mould to your advantage.


Profitable ETF Trading Strategies – Developing the Daily Trading Plan

Ken Long asked:

Trading the markets on a daily basis with short term strategies places a premium on efficiently and effectively developing a comprehensive daily trading plan.

Short term trading can be a very rewarding part of an overall trading and investment strategy. Without a sound and comprehensive plan, though, there are just too many ways to go astray for the novice trader.

Each trader should develop their own methods for daily preparation, suited to their style and personality. It can be a challenge though for the novice trader to get started with this daunting but essential task.

Here is a simple way that a trader might go about developing a daily trading plan, proceeding from the top down.

Prepare your notes in 3 sections: market, intermediate, tactical (short term) and go through a set of structured questions like these:

What is the market condition, what is it doing, does it give you a bias for tomorrow?

What is the intermediate condition? Consider using indicators like Williams%R, portfolio exposure, and ADX condition.

Are there any swing trades that have stories going on that carry over from the previous day?

What is the short term condition/ideas of interest? consider: gap statistics, SPY Pivot Points, any carry over positions from yesterday, any patterns fired? These could include patterns like overreaction, channelling, triple screen, 5 days down and washout.

Are there any maximum pain candidates to be aware of? Are there any continuation patterns that I am especially interested in?

Once you answer those questions, you should have anywhere from 5 to 15 tradeable ideas as soon as the market opens.

At the open you should consider the gap, then the 5 min Opening Range, examine the price with respect to the pivot point numbers.

After about 15 minutes into the session, you could look at, in order: indexes, ETF2 positions, and your developed interest list to see where the strength and weaknesses are. This quick scan will suggest more targets.

A simpler alternative is to have a narrowed focus on a stable of reliable targets, and do an abbreviated version of the above scan by considering the market and intermediate conditions but then focus on the state of each of your reliables for trading ideas.

All interest list members should be framed in the usual way, so you have a decision support framework in place before the market opens. You will then know where you can buy upon evidence of tactical momentum fearlessly.

You will also have a playbook of situational trades, just waiting for the market to show you what it is doing.

If you need some guidance on how to develop your daily short term trading plan, these ideas may help to get you started.


ETF Trading Strategies Explored – Be the First to Know

Mark Brian asked:

Strengthening portfolios, by trading ETFs is a common occurrence among investors today. Portfolios are packed with bonds, stocks, representatives of a stock collection or commodities from a specific sector. There are financial ETFs, bond ETFs, oil ETFs, and also gold ETFs. Using ETF trading strategies to further the growth of your investments might be just what you are looking for. The following information describes various strategies used among investors of Exchange Trade Funds.

Placing Bets on Sectors – Betting on entire sectors at once isn’t uncommon today. Many investors prefer to place bets on stocks of a specific kind instead. Let’s say an investor wanted to keep an eye on the euro, whereas his comrade prefers to follow all currency ETFs. This is an example of one investor focusing on an individual stock, while the other monitors a whole sector.

Options for Bond Betting – Bets are able to be made on anything that can be tracked by an index. Tracking of this kind can be used for segments of a yield curve, corporate bond indices, or Treasuries with inflation protection. There is a relationship between the maturity time and the interest rate on borrowed money in a give currency.

The Strategy of Pairs Trading – An algorithmic trading strategy is the basis for pairs trading today. This strategy is built around models which decide on the amount of spread, based on data mining and historical analysis.

The term hedging is used when referring to stocks and its derivatives that have pairs trading going on between them. When one stock goes up and the other goes down, the one that went up is sold. After selling the stock that traded up, the stock that went down is purchased. This swap is done with the thought that since one went down, it must be getting ready to go back up. Trade pairs may include companies such as Wal-Mart and Target, Dell and Hewlett-Packard, or Pepsi and Coca-Cola.

Industry Emphasis – The weight of portfolios can be shifted towards specific industries by buying ETFs within the same industry or sector base. Having a broad-based ETF and then buying a health-care ETF will bring about health care industry exposure to your portfolio.

Predicting the Market – Being able to predict what will happen on the market, with ETFs, enables investors to buy or sell with confidence. Timing the market is the strategy of deciding to either buy or sell stock by also trying to predict what the future of the market will be. Predictions are based on either conditions within the economy or from the result of a fundamental analysis. This strategy is based on an aggregate market prediction instead of a specific financial interest.

Making sure you understand these ETF trading strategies described above will make you a more knowledgeable investor.