Trend Following

TME 029: ETF Trading


What is An ETF?

An ETF or Exchange Traded Fund is a marketable Security. An ETF can track an index, a commodity, a bond, or a basket of companies. ETFs typically have lower fees than mutual funds. They trade like stocks. The price of an ETF changes throughout the day.

What is ETF Trading?

If you could come up with a fund that is perfect for the small trader it would be an Exchange Traded Fund. Mutual funds have been around for years for the buy and hold investor. Mutual funds offer diversification to the buy and hold investor.

ETFs have been around since the early 80’s but they have gained popularity just recently.

When the automobile came out it was a luxury that everyone could not afford. With mass production the automobile became more affordable. There are still vehicles out there that are out of most people’s price range, but for most people there is a vehicle out there that is affordable for everyone. That is what ETF’s do for the small trader.

Many systematic trend following models use futures in trading. Futures are way to risky for the average everyday trader. Many times one futures contract can be worth more than 100K. If you buy an ETF that tracks a futures contract you can buy as much or as little as you want. You could buy $100 to $100,000 or more.

ETFs open up opportunities to markets never available to the small trader before.

ETF VS Mutual Funds

Mutual Funds are probably the most popular investment of the modern-day. Most 401K accounts are heavily invested in mutual funds. They offer diversity spreading money over many companies and sectors. Mutual funds are for the buy and hold investor. Mutual funds are a poor choice for the trader. If you try to trade a mutual fund they may lock you out for some period of time.

An ETF trades like a stocks, a mutual funds does not. You cannot sell mutual funds midday, a Mutual Fund Sells at the end of the day. That means is if your system tells you to sell mid day then you are out of luck with a mutual fund.

So an ETF is more versatile for a trader.

Types of ETFs

 ETFs have gained in popularity over the years. There are many different types of ETFs now that were not available just a few years ago. The following list is just a few of the many ETFs a trader can trade.

  • Oil ETFs (USO, OIL, UCO, UWTI, DBO, etc.)
  • GOLD ETF (GLD, IAU, DGL, UGL, GLL, etc.)
  • Natural Gas ETFs (UNG, UGAZ, DGAZ, etc.)
  • Technology Sector ETFs (XLK, VGT, IYW, FDN, etc.)
  • Agriculture ETFs (DBA, RJA, JJG, CORN, etc.)
  • Financial ETFs (VFH, KBE, KRE, IYF, FXO, etc.)
  • Index ETFs (SPY, QQQ, DIA, IWD, etc.)

This is just a sample of the many ETFs that are available today.

ETF Trading Strategies

There are many trading strategies that traders use. An ETF makes it easy to use these strategies. Below are some strategies we use when trading ETFs.

ETF Trend Trading

As we have said before ETFs trade like stocks. When you sell a stock or an ETF at that point it sells. It does not sell 2 hours later. It sells when you place the order. This makes ETFs perfect for trend trading. In trend trading you might need to get in and out of the market several times before the market starts to trend. An ETF makes this trading style possible.

An ETF trades closely with the underlying asset. When the asset is in a trend then the ETF is in a trend.

Systematic ETF Trading

As we have talked about many times before we trade in a systematic way. Since ETFs trade like stock the quotes are instant. The computer can calculate and give signals throughout the day. Our signals for a day are set before the market opens that day. Our alert system uses real time data to alert us when a signal is hit. Since the quotes are instant there are no delays when the signal is hit.

ETF Trading System

It Does not matter if you are trading Corn Futures or the CORN ETF you need a trading system. An ETF trading system is no different than a stock or futures trading system. It should be automatic. The trader should trade the same way on every trade. It can be manual or computer based. That really doesn’t matter. It just needs to be systematic. It needs to be repeatable.


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