TechniTrader Weekly Stock Discussion: “Trading with Exchange Traded Funds ETFs”

MetaStock® SPRS Series - Week 141 – October 18, 2013 - MetaStock Spatial Pattern Recognition Skills Series  written by Martha Stokes CMT

Nowadays, there are far more opportunities for making extra monthly trading in the stock market than ever before.  One hugely popular area is the Exchange Traded Funds ETFs.  This is a relatively new trading instrument that is a derivative. Just picking any ETF and trying to trade it is a great way to lose money.

There are many different kinds of Exchange Traded Derivatives:

ETFs are based upon an underlying group of stocks or group of funds that are held in a trust account long term.

ETNs are based on different kinds of bonds or debt securities that are held in a trust account.

ETCs can be either based on commodities futures contracts or currency contracts.

Then there are the leveraged ETFs which are designed for very specific institutional needs that most retail traders do not understand. Any leveraged ETF is prone to sudden price shifts as these must be rebalanced from time to time to maintain the leverage aspect.

The most popular and most commonly traded ETFs are also the oldest which are the SPY, DIA, and QQQ. These are based on a specific type of weighting formulation, and are often used for longer term investing. However there are also many different types of weighting used in different big index ETFs. Understanding which weighting is right for your trading or investing can make a substantial difference on your Return On Investment ROI.

As an example SPY is the oldest EFT and is Market Weighted. RSP is an Equal Weighted ETF and they provide significantly different ROI when holding in a longer term position, see the charts provided below. Although the charts are very similar, the net profits are significantly different over time.  Even if you are a short term trader, this can affect your profitability.

Learning to trade ETFs requires an understanding of the purpose, the type, and the issuer intent. It also requires learning whether it is suited for long term or short term trading, and whether it is leveraged or not.  In addition it is important to determine which market participants are using the ETF, their long term and short goals, and speculation.

When an investor or trader takes the time to understand the controlling factors behind their action and how these derivatives are developed, created, and their purpose, it makes it far easier to choose the proper ones for your personal goals and trading parameters. Trading is not just about finding a stock or ETF to trade, it is also about understanding the market structure and market participant groups who are actively trading in that stock or ETF.

By going beyond mere indicator or candlestick patterns, the retail investor or trader can dramatically improve their ROI and profitability regardless of their personal goals and trading preferences.  Always know what you are buying beyond mere chart patterns, otherwise you are trading blindly with a lack of knowledge that can cause substantial losses.

For more information regarding investing and trading ETFs, sign in to consider taking the TechniTrader Online Course titled “(ETF) Exchange Traded Funds & Index Trading” at  http://goo.gl/kDy9lc

Trade wisely,

Martha Stokes CMT

http://technitrader.com

Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses

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