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Getting A Handle On ETF Trading Strategies

Todays Date: January 18, 2019

As an investment vehicle that can promise a consistent — and sometimes exceptional — rate of return on investment (ROI), exchange traded funds can really deliver. Getting a handle on ETF trading strategies will be necessary, though, before jumping into investing in ETF’s in any meaningful way. There are a few things to know, first of all, about exchange traded funds.

These particular funds resemble mutual funds in some ways, especially in how they are set up. Additionally, ETFs usually restrict membership — if you want to call it that — to what ETFs refer to as “authorized participants.” This usually means institutional investors who have the ability to buy and sell huge blocks of assets. Small investors can participate through ETF trading systems, though.

Imagine corporate stocks and how they are traded or bought and sold and you will have a good idea of how exchange traded funds are also moved through the markets. Almost every exchange traded fund establishes its operations so that it can track one or several of the major market indexes. For example, many track the S&P 500. This makes it easier to follow trends and set up trading strategies.

For a fact, there are endless trading strategies out there that can be used to track market movements and then timing buying and selling by those movements. Most, however, fall into two categories known as technical trading strategies and fundamental trading strategies. Technical strategists believe they can pick out shapes and patterns in market movements.

For those with the ability to pick out shapes and patterns in market movements — by analyzing a stock chart — the possibility of good income is very real. These movements can signal upward and downward movement in markets that can be timed through technical analysis, with the correct buy and sell orders put in at the right times.

One of the most common technical trading strategies used by many traders is what is called a “moving average cross.” Moving average crosses try to match up a short-term evolution in the price of the stock and superimpose that over a long-term trend in that same stock or market. By tracking a short-term up-and-down movement over– to 25 days, it may be possible to establish a moving average line.

Once the moving average line can be established, traders then take that line and lay it over the analysis of the short-term movements in order to pick out the actual movement in the price of a stock or asset such as held in an ETF will result in after the stock crosses over the moving average line. The second part involves long-term trends, which use a 50 day moving average in order to smooth out the short-term trend.

In this way, ETF trading strategies involving the long-term trend can be used as what industry experts call a “moving support line.” A typical strategy by most traders in this instance would be to purchase a stock or an asset in the ETF when it is in the beginning of an uptrend or if the stock price goes back up after it either touches or barely penetrates the 50-day moving average. One could short the stock also.

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