Before I will explain how I trade ETF’s I first want to get into the type of investor that is best suited for ETF trading. An ETF is both suited for long term investors and short term day traders and everyone who is in between.
Day traders love trading ETF’s as you can buy and sell an ETF whenever you want, just like common shares. You will even find ETF’s that work on leverage, great for these fast day trading boys and girls.
Trading ETF’s is popular among many types of investors, from house wives to millionaires and from central banks (Japan for instance) to pension funds. But how ETF’s are being traded depends of course much on the type of investor you are.
The reason I am trading ETF’s
Besides all other advantages ETF’s have (which I explain in other chapters) I found out after 30 years of investing that ETF trading suits best my style of trading the markets. That my friends, is the most important reason I exclusively trade ETF’s.
For my own account I am not a long term investor that will stay in a position for several years. But I am not a day trader either.
When I get into a trade I have no problem in being in that trade for weeks or even a year but when I gained enough profit I will get out. I will get in again after a decline and by doing that I will get a better return if I was sitting it out.
So I am a very active investor who is keeping track of the markets day in and day out. Only by trading actively and by avoiding risks it is possible to reach my goal of an annual return of 35% to 50%.
How I trade ETF’s
I use the waves you see in charts to trade ETF’s. But I am not exclusively following the charts as it is by no means a fixed rule that everything that will go down will go up again. I never trade with a single focus on the charts.
But how exactly do I trade? I follow the economic news on a daily basis. I do this to understand where we are heading and what to expect from basic materials, indices, sectors etc. When I become positive or negative about something I will think what I can do with that regarding my ETF trading.
I trade ETF’s based upon a variable weighed probability calculation which I developed for myself. With this calculation I decide whether an ETF is buy-worthy and what return I may expect and the chance of obtaining that return.
I will never get into a trade complete and full. I will build up a position in steps. Buying exactly at the lowest price is never possible and you should not even try this. If an ETF is declining further I will buy in more and when it is rising I will not buy.
Adding to your positions is not a wise strategy for most financial products such as shares and options. With ETF’s this is easier as they have a reasonably reliable average price.
I am trading ETF’s without a safety net
Sounds a bit stupid, doesn’t it? I will explain it. Normal ETF products will never go back to 0 as indices, commodities and groups of stocks may lose much of their value but they will never go broke.
So the chance of losing all your money is negligibly small. The most negative scenario would be that you will have to wait for a very long time to get back your money or you just have to cope with a limited loss.
What I do is making sure that my spread is good by trading different ETF’s on different markets. In doing that I limit my risk. If I have any doubts I will never get into a trade. That won’t be necessary either as I am able to invest in such a wide variety of markets through ETF trading that there always are good opportunities.
Trading ETF’s without a stop loss
It is not my intention to advise against the use of stop losses but I must confess that I have bad experiences with them. Whenever you put your stop loss too short, say a loss of 2%, then it will almost always be reached and I get out of the trade with a loss of 2%.
Whenever you put it very far from your entry point, let’s say 10%, then it will not be reached as easily but when it does it may be a downward spike that is often a prelude for a bounce back to something, like a 5% loss for instance. But you will not gain from this bounce as you just left the table.
The most scary part of stop losses is that they are not fixed stop losses and that may cause some heavy headaches. At periods of flash trading you sometimes come across situations of very short spikes. Say you have a stop loss at minus 5%.
The ETF goes down to minus 15% in a couple of seconds and bounces back again. Your stop loss has been reached and it triggered a market order at that point. Chances are big that you will find a buyer when it has reached minus 15% leaving you with a much greater loss you were calculating with.
And that is the main reason I have stopped using stop loss orders as you are not getting the security you are aiming at. The main reason is that a stop loss order does not trigger a limit order but a market order, keep that in mind!
Why I do not use put options when I trade ETF’s
You know the words: “always protect your positions in an insecure market by buying put options”. I just get out of a market I do not trust anymore and I will sell the ETF immediately.
You may limit the loss of an ETF through put options but what you also do is limit your profits when the markets go the way you have predicted. Very often you will have to buy new put options when old ones expire and then you enter a territory where making a profit is almost unattainable.
Anyone with some investing experience will know of course that successfully trading options is a profession not many people master.