Using Etfs In A Trading System
The popularity of exchange traded funds (ETF"s) grows each year
. There are almost 1,000 ETFs available to trade including almost any asset class imaginable. Some of the bigger ETFs are offered by ProShares, IShares, and the SPDRs.There are multiple reasons for the increased popularity. The biggest attraction may be that ETFs are thought to be less risky than individual stocks. Because ETFs are a basket of underlying securities the business risk of single stock exposure is eliminated. There"s no chance of corporate shenanigans affecting an ETF like it would an individual stock.
Other benefits of investing with ETF"s are:
"The market can be traded on both the long and short side. This expands the opportunity for profits because an investor can gain from a rising and a declining market.
"Some ETF"s are leveraged. More assertive traders like the concept of increased leverage. There are now ETF"s with not just double the added leverage, but also triple.
"The ability to trade multiple markets is possible. Oil, gold, silver are a few of the possible commodity ETFs. World markets are accessible "" country specific investments like: Brazil, China, Japan, etc.
"The currency market is available with many ETFs -- there is likely an ETF for all major world currencies.
"Option trading --just as with stocks the same option strategies can be applied to ETFs.
"Portfolio diversification is simple given the multitude of asset classes, sectors, countries, and currencies represented by exchange traded funds.
"ETFs are not only popular with the investing public, but also with hedge fund managers and day traders. One of the reasons, besides being great trading vehicles, is that they are useful as hedging tools.. Hedging with ETFs can protect the profits in a portfolio and it can be accomplished inexpensively.
As with single stocks, technical analysis techniques are suitable to ETFs. It"s possible to successfully use trend following indicators and oscillators. Charting the price movement is no different than graphing a stock. The major index ETFs move very smoothly and are great instruments to trade. An active investor could make a good living trading only index ETFs.
One warning "" note the volume on each individual exchange traded fund. Many such as the SPY, QQQQ, DUG, and DIG have plenty of volume. Some of the more obscure, like some sector ETFs are thinly traded and should be avoided.
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