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Developing a perfect ETF trading strategy

ETFs have been around since 1993 and have experienced tremendous growth over the years. More and more investors are investing in ETFs for a variety of reasons.

Reasons for investing in EFTs

Investors love ETFs because they provide diversity to build their portfolios.

Ease of trade is another reason, as they can make most trades during the day, unlike mutual funds that only allow trading once per day after market hours.

Many investors choose ETFs because they have low expense ratios relative to traditional mutual funds. Some ETFs do not even charge expenses, which makes them free to hold!

While many other features make ETF attractive for investors, these three reasons form the basis of this article. We will explore how well that has worked for investors who have invested in ETFs using different investment strategies.

We will define our benchmarks and then define the three ETF trading strategies involved to find the best EFT to buy now. If you are unfamiliar with terms like beta, alpha, R squared, etc., consult your financial advisor before attempting any analysis/trading using these methods/strategies.

The application of these methodologies involves analyzing a series of historical stock prices.

Although we believe the success rate is very high, they imply no guarantees because of the statistical analysis involved.

Do you have an end goal in mind?

Having a goal in mind is one aspect that many investors cannot address before getting into ETF investing. There are various ways to approach it, but the preferred way is to determine your goals first.

While doing so, note what proportion of capital you would allocate to each goal, i.e., emergency fund, children’s education funds, etc.

It becomes easier when you’ve determined your net worth and cash flow statement using online tools like Mint or YNAB.

Determining your goals helps determine the amount to be allocated and the type of investments it should go to, e.g. stocks or bonds, etc.

If you are new to ETF investing, you can start buying an individual stock before diversifying into ETFs. An alternative is to invest in mutual funds or index funds if they suit your needs more.

Why not buy an all-in-one ETF fund?

I wouldn’t recommend using this approach due to a lack of control and flexibility.

Too many fees are involved either on the front end (fund expenses) or the back (trading fees). These fees will eat up returns that can be invested elsewhere for greater returns.

Second, there is little diversity available from a single source. If your entire portfolio comprises one ETF fund, it exposes you to whatever under-performance individual security experiences. It will affect the overall health of the portfolio.

Third, if the market runs into difficult times and many stocks head south, an all-in-one fund can be dangerous for investors who do not have a sufficient cash cushion available.

Since it is unlikely, they’ll be able to take advantage of selling/buying opportunities quickly should they arise at any point in time.

Funds like this offer few choices compared to buying individual stocks, which gives more flexibility if markets turn south or upwards.

Why buy individual stocks at all?

Although there are other ways to approach investing, such as mutual funds, index funds, I prefer buying individual stocks. The chief advantage is making more money from price gaps created from stock splits and dividends, respectively.

This can be a great help in generating additional passive income.

In addition, having complete control over which stocks they can buy gives investors a boost in overall performance compared to ETFs or other alternative investments.

I’ve found that it becomes easier for me to determine good entry and exit points instead of index funds where you have little choice but to buy what’s available regardless of market conditions.

When should you take profits/losses?

This depends on your specific goals and your risk appetite. Taking profits when an investment has doubled is considered conservative, while those who want to grow their net worth in the shortest time possible would take more significant risks by holding onto stocks longer.

The nature of ETFs differs from an individual stock, which makes them a better choice in terms of risk and gain potential. It’s advisable to enter and exit positions when prices show signs of moving between ranges, for example, when they break out or break down from consolidation areas.

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