Stock Trading Systems

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The popularity of exchange traded funds (ETF’s) grows each year.   There are nearly 1,000 ETFs available to trade covering almost any asset class imaginable.  Some of the bigger ETFs are offered by ProShares, IShares, and the SPDRs.

There are many reasons for their increased popularity, especially with the individual investor.  The primary attraction  may be that ETFs are considered 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 wrongdoing affecting an ETF like it would an individual stock.

Other benefits of ETF trading are:

• The market can be traded on both the long and short side.  This increases the opportunity for profits because an investor can gain from a rising and a declining market.

• Some ETF’s are leveraged.  More aggressive 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 easy given the number of asset classes, sectors, countries, and currencies represented by exchange traded funds.

• ETFs are popular with the investing public, but also with hedge fund managers and day traders.  One of the reasons, in addition to the ease with which they are traded, is using them to hedge.  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 apply trend following indicators and oscillators.  Charting the price movement is no different than graphing a stock.  The big index ETFs move very smoothly and are great to trade.  An active market participant could make a good living trading only index ETFs.

One caveat – note the volume on each individual exchange traded fund.  Many like the SPY, QQQQ, DUG, and DIG have plenty of volume.  Some of the more obscure and often times, sector ETFs are thinly traded and should be avoided.