Finding An Effective ETF Trading System
December 22nd, 2009
When choosing an ETF trading system that will be effective a person will want to factor in their own eccentricities. Some people enjoy doing analytical work and following trends. Other people want to have a software program or web service that will do the leg work for them and give them the best bet on an ETF trade. The systems that are available run a wide gamut. ETF trading systems have hundreds of systems that work for some people and don’t work for others.
A person either has to find a trading system that can adapt to the many sectors they will be working in, or be able to retrieve the effective trading system for the sector they are in. A trading system that has been designed for long positions is not going to be effective in sectors that have primarily short position trading. A trader dealing with leveraged ETFs will want to have a system that they can adapt to meet the level of risk attached to this ETFs.
There is no magic trading system that will make a person a lot of money very quickly. It would take the fun out of ETF trading for one thing. But also, this is a market that is affected by millions of little details that just can’t all be accounted for. Then, there is the fact that some people work very well with a system that no one else can figure out.
The easiest system to start with that provides minimal risk and will get a traders feet wet is the EMA system. EMA stands for Exponential Moving Average. It involves following trends, and has a pretty decent risk rating. The ETFs most traded using this system are TLT, XLF, SMH, RTH, and a few others.
The crux of the system is that when the fast EMA crosses above the slow EMA a trader goes long. When the slow EMA crosses the fast EMA, the trader goes short. The rule is that a person has to leave or reverse their position the date after the fast EMA and slow EMA cross. And, when the rules have been set up on the days for the EMAs to cross, usually fifteen, the trader needs to stick to them.
Even this simple system will require that a person do the necessary research on each sector and follow their trends to make effective trades. It is important to set buy and sell limits so that one does get caught up in trading and lose more than they intended.
Setting up a risk allotment will also be important. Setting a percentage of the total capital one is going to risk on a position then moving when the threshold is reached will be beneficial. Adding to an account once it has crossed the threshold is not advantageous to gains. Setting the number of losing trades that one will have in a row and the percentage that will be cut back after that threshold is crossed will also avoid slipping into losses.
When choosing the ETF trading system that will be most effective it is important to gain as much knowledge as possible about the system. By using systems which have a history of consistent effectiveness a person will have a better opportunity to use and learn from the system as they get into more complex trading. Seeking the assistance of a professional who has expertise in ETF structure, trading, strategies, and methods will also be extremely helpful in developing a trading system that will be successful.
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