Profitable ETF Trading Strategies – Sector Contrarian

Ken Long asked:

There is a new conventional wisdom beginning to emerge from the stock market these days and it says that there’s no way you can make money in a bear market unless you have the good fortune to be an expert market timer and bet against the recovery of the broad market. While it is true that having a sense of market timing can improve your bottom line, that’s not the only way to take advantage of the current turbulence. By paying close attention to a select group of exchange traded funds that represents important business and commodities sectors in the global market, an astute trader can find very reasonable trades with favorable reward to risk ratios which offer a way to trade these markets effectively.

Here is an example in oil, which can be traded using an exchange traded fund with a symbol of USO.

Go to any web-based free stock market charting website, like Yahoo finance and call up a 15 year chart on a barrel of oil using monthly candlestick charts.

You will see that this commodity trades in long powerful swings that can last months at a time. You will also see that at crucial turning points the reversal of the trend can be swift and violent. This means that to trade this exchange traded fund effectively, you must be alert to where we are in the current trend and be alert to the possibility of turning points at critical price levels.

Currently, we are near the bottom of the most violent selloff in the shortest period of time that oil has experienced in the last 15 years. A barrel of oil recently traded for under $30 a barrel while only a few months ago it was trading near all-time records above $130 barrel. A selloff of this magnitude is an indication of a market overreaction, where emotions have gotten in the way of rational judgment. This is entirely normal and should be expected.

In the last few days however, oil has put in the intermediate bottom and is prepared to make a traders reversal to the upside. This move is supported by the news of increasing violence between Israel and Hamas, coupled with a recent decision by OPEC to reduce oil production in order to bolster the price of barrel of oil. Taken together, these facts all point to the possibility of a short term rise in the price of apparel of oil of 10 to 20%, while the recent price reversal offers a definable support level at $28 a barrel. This is a reward to risk ratio of greater than four to one, and an astute trader can begin a buying program whenever he sees the price of oil actually going up during trading hours. This provides an additional level of security for short-term trading.

If you examine the behavior of the price of oil after the market opens you will see that in the last 200 trading days price moves in the direction of the opening gap. So, if you see oil gap up there is the good probability that it will close higher than the open that day. Conversely, if oil gaps down then you can expect the price to be lower by the end of the day. This relationship is not always so readily apparent in oil nor can it be used as a simple rule for any other exchange traded fund. Only by constant attention and analysis can you discover these kinds of tradable trends emerging from today’s volatile stock market. The rewards for this hard work make it worth the time for disciplined, pragmatic trader.

By looking for these kinds of favorable reward to risk ratio trades, a short-term trader is able to take advantage of today’s volatile stock market in a risk measured way that makes a lot more sense than simply dumping money into a passive mutual fund and hoping for success. Naturally, you must do your own due diligence and take personal responsibility for your results. Good trading!

Claudia

ETF Trend Trading Newsletter – Free ETF Strategy Report

Robert R Stanton asked:

Trading has been a very important part of the world’s economic system for a very long time now. Its roots can be traced back to the earliest of civilization.

However, with time the system of trading has evolved into a new phenomenon. Today trading is a dynamic pulse that keeps the market going. Any damage or difference in that pulse is felt by the market as a whole.

With so much importance being loaded onto trading, it’s no wonder that there are an increasing amount of rules and strategies that have come up with each passing trend and situation.

There are mutual funds, stock trading, and share trading and now there’s the ETF or the Exchange Traded Fund. They are the newest and possibly the simplest and safest way to understand the power of a profit making trend trading system. They are somewhat like the mutual funds but with more flexibility.

ETFs are not that hard to understand. An ETF trading newsletter makes understanding of this type of trend trading even simpler.

A worth while newsletter will shed a new light on trending markets and explain old strategies that have been tried and tested through time. Also, you should discover newer strategies that have evolved over time and the changing trends.

The bottom line is an ETF newsletter lets you in on insider secrets of profitable traders. There are many obvious qualities in almost anyone that can help them be a successful trader. However, people tend not explore these qualities in depth which leads them to passing their whole lives without latching on to the secret that they could be successful traders.

The quality to take on risks is one of the most basic qualities that a trader has to possess to make it in the trading market. Then he has to have patience and perseverance to stay in the market through ups and downs because if there are ups there will inevitably be some downs and you have to be prepared to face them all to be a successful trader.

Apart from this the newsletter is also beneficial in getting to know the technique of calculating your performance in the market. This is necessary to keep a keen eye on the profits and loss and will help you to prevent yourself from falling into a set pattern or maybe a developing a new pattern for more profit.

The newsletter also tells you about the differences between various types of trading and then goes on to demonstrate why ETF trading is one of the safest ways of trading. It tells you about your profit margins and interest rates as well as how it relates to any type of market condition.

Even a reputable, free ETF newsletter can be an important tool for all who want to launch into trading ETFs. You can get to know a lot by spending some time studying ETF newsletters in terms of how the top traders trade. Once you understand the nuances of trading you can be successful in any trading environment.

Jorge

How to find underlying value of an Exchange Traded Fund?

Evan D asked:

I have recently become interested in Exchange Traded Funds. I was wondering how one might go about calculating the underlying value of the assets held by the fund and where the information needed to do so would be acquired.
I am not talking about the assets I hold but the assets held by the fund.

I know basically how to do it but don’t know where to get the information.

Jimmy

The Advantage of Exchange-Traded Funds (ETFs)



The Advantage of Exchange-Traded Funds (ETFs)

The Advantage of Exchange-Traded Funds (ETFs)

Author: Dr. Winton Felt

ETFs (Exchange-Traded Funds) which can be traded like stock at any time during market hours, have low expense ratios, have less risk than individual stocks, do not have some of the tax disadvantages of a regular mutual fund, do not pool investor capital, and are constructed so they are far less susceptible than “standard” mutual funds to the fraudulent behavior of some investors. Though they trade like stock, they are similar to sector funds and index funds in the construction of their portfolios.

If you are interested in sector and index investing or if you are a little afraid of the volatility of individual stocks, you might consider exchange-traded funds (ETFs). In a regular “open” mutual fund, investors buy shares directly from the fund. When they want to sell shares, they sell them back to the fund. Assets are held in a pooled account. An ETF is actually a mutual fund that trades (and is bought and sold any time during market hours) just like a stock. Investors buy shares from and sell shares to other investors just as if they were buying and selling stock. Your assets do not share a “pooled account” with other investors in the fund. There is no load or fee levied by an ETF when shares are bought or sold. The only costs for buying or selling are the same fees that are charged for stock transactions.

An ETF is actually a mutual fund that is traded on a stock exchange. ETFs are usually collections of stocks or bonds. For example, our own tracking list includes ETFs that combine groups of stocks in various US sectors (technology, real estate, utilities, Biotech, energy, healthcare, etc.), investment types and styles (Small-Cap Growth, Mid-Cap Value, Small-Cap value, Large-Cap growth, Consumer Non-Cyclical, US Treasuries, and so on), other countries or economies (Australia, Belgium, Germany, Hong Kong, Malaysia, Spain, Japan, etc), various multi-country regions of the world (Emerging Markets, The Pacific, Europe, Latin America), and Indexes (Dow Jones Industrial Average, S&P 500, Russell 2000, S&P 400, Dow Jones Utilities, etc), and others. A stock ETFs does not have the same kind of risk as an individual stock because it is a collection of stocks. For example, assume a utility ETF has 30 utilities in it. If any one of those utilities drops 40%, it will have little effect on your portfolio, even if your portfolio is fully invested in that one ETF. If all the other utilities in a 30-stock ETF remained constant, a 40% drop in one of those stocks would cause a drop of only about 1.33% in your entire portfolio. Thus, ETFs would generate fewer trade confirmations from the broker because the drop of an individual stock in an ETF probably would not be sufficient to trigger a stop-loss order. The stocks in the ETF would have to go down enough as a group to set off the stop-loss. ETFs can be monitored and charted throughout the day just like other stocks.

Index ETFs closely match the behavior of their respective indexes. The behavior of sector ETFs is similar to that of no-load sector funds. The latter ETFs tend to be less volatile than individual stocks (a natural consequence of the fact that each ETF has more than one stock in it) and therefore do not have quite the profit/loss potential of individual stocks. However, the sector ETFs are more aggressive and volatile than fully diversified funds and have greater potential for profit or loss than those funds do because of their narrower focus. Though they do not have quite the same potential as individual stocks, they also have less risk and their potential for profit is nevertheless very attractive. For example, our stockdisciplines.com traders report that they have seen the Dow Jones Real Estate ETF gain over 30% in a year and the Dow Jones Technology ETF rise from about 38 to over 52 (or over 35%) between June and January.

When you invest in a regular mutual fund after it has had a gain, the price of the fund shares reflects those gains. Thus, when you buy, you are paying for those gains. The fund will distribute that gain to you (return your own money), causing the shares to drop in value from what you paid for them. You then have to pay taxes on that gain even though you did not participate in it (you are actually paying taxes on the return of your own investment capital because you did not own the shares until after the gain was made). ETFs are not like this. With ETFs you’re far less likely to get any capital gains distributions on which you have to pay taxes because most ETFs do not have active managers. In that regard, they tend to resemble indexes and index funds. Their portfolios become relatively static after the managers buy stocks representing particular indexes or sectors. For example, Barclay’s Global Investors, which has many ETFs they call iShares, reported “zero year-end capital gains for [its] entire fund family” in one year we checked. However, the fact that the components that make up most ETFs rarely change does not keep an individual from changing the ETF components of his portfolio as different sectors gain and lose strength, just as he would make changes in a portfolio of ordinary stocks. Of course, taxes would have to be paid if an ETF were sold at a profit, just as with any stock. Like ordinary index funds, ETFs boast ultra-low expenses and little opportunity for the big players to cheat or take unfair advantage of little players. Individuals can buy or sell an ETF anytime the market is open, so if a person decides to bail out at 3:13 p.m., he can be out before 3:14 p.m. The procedure for doing this is identical to the procedure for selling any stock.

Though many mutual funds and ETFs are managed similarly during “rational” markets, ETFs have a potential advantage when investors are suddenly overcome by fear. ETFs do not have to liquidate portfolio positions as shareholders redeem shares. Therefore, ETFs are better situated to ride out a wave of selling without incurring damage to the structure of their portfolios (it’s also not necessary for ETF managers to keep large amounts of cash available to meet the potential redemptions of frightened shareholders). Furthermore, because they are traded on an exchange like ordinary stock, they cannot be affected by the dishonest behavior of other investors in the same pooled account as is possible in most ordinary mutual funds nor by special treatment given to a few at the expense of the many. ETFs also are not subject to the illegal form of market timing that once darkened the reputations of so many mutual funds. Like traditional open-end mutual funds, ETFs distribute their earnings to shareholders in two ways. First, income dividends from interest or stock dividends are passed through to shareholders, net of expenses. Second, realized capital gains distributions (net of realized capital losses) are passed through to shareholders–usually once a year in November or December.

ETFs are completely free from scandal. The very structure of ETFs makes it extremely unlikely that investors would ever be affected by any fraudulent behavior on the part of fund managers. They are flexible investments, charge no load, and have a very low expense ratio in comparison with similar no-load mutual funds of the “standard” variety.

Copyright 2009, by Stock Disciplines, LLC. a.k.a. StockDisciplines.com

Article Source: http://www.articlesbase.com/investing-articles/the-advantage-of-exchangetraded-funds-etfs-929782.html

About the Author:

Dr. Winton Felt has market reviews, stock alerts, free tutorials, strategies, stop-loss tool, signals, The Valuator, price surges, volume changes, stock scanner, setups, watch list, strongest 50 ETFs at http://www.stockdisciplines.com Information and videos about stock alerts and pre-surge “setups” are at http://www.stockdisciplines.com/stock-alerts Current stock alerts are at http://www.stockdisciplines.com/alerts


What is the difference between a Exchange traded fund and a index fund?

Maurice R asked:

I am 21 and i ma looking to put my money back to work for me this year. I was told that my best bet is to invest in a index fund that track the S&P 500. However i am also being told that Exchange traded funds (EFT) are the way to go. I would like to know what is the main differences between the two. Any help at all would be greatly appreciated.

Emily

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?

Emily