ETF

Avoid These Four Technical Pitfalls

 Everyone is a chart reader these days, but the venerable practice isn’t as easy as it looks — there are just a few ways to make money but a thousand ways to be wrong. This is especially true now that all sorts of fundamental types are staring at price patterns because their 9-to-5 discipline no longer works.

The devil is in the details with pattern analysis, because no two charts are exactly alike. And above all else, chasing the same patterns that everyone else sees in the books, or on the Web, it is a straight shot to the poorhouse. But that doesn’t stop legions of amateur technicians from throwing cash at the same losers over and over again.

In reality, observant technicians can find good trading opportunities with relatively little effort, because they know exactly what to avoid when looking at similar sets of patterns. This is an advanced skill set that’s missing with the majority of folks who believe they possess magical powers because of their chart divinations.

With this admonition in mind, let’s talk about stock scanning and your evening research. Chart database programs offer advanced tools that search quickly for your needle in the market haystack. Many traders think the purpose of these nightly scans is to find perfect positions that can be mindlessly executed, but nothing is further from the truth.

The most accurate scans just take you to the next step, where you’re forced to discover the trading opportunity for yourself. This “last yard” of effort is where armchair technicians fail miserably, because their unskilled eyes try to fit all sorts of random chaos into predictive patterns that, in reality, aren’t so predictive.

The most effective way to overcome this form-fitting bias is by embracing subtlety when you’re flipping through the price charts. You can start by internalizing these four cautionary patterns that are lying in wait to steal your money.

Bunny Slopes

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There’s little profit when price rises or falls in an overly gentle pattern. Conversely, real opportunity comes when strong tension between bull and bear energy gets released suddenly, trapping one side and triggering sharp directional movement. Of course, this is nothing more than opportunity cost translated onto pattern analysis.

The good news is it takes only a second or two to identify a weak angle of attack on a price chart. Ironically, trading bunny patterns during periods of high volatility is a bona fide defensive strategy, because it limits risk. Perhaps that’s why you’ll find so few of them after last year’s market crash.

Border Disputes

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Stand aside when price action gets caught at, or in between, big moving averages. These conflict zones eventually yield trades, but patience is required because the battle can go on for weeks. For example, notice how Broadcom (BRCM – commentary – Cramer’s Take) has chopped along the 50-day moving average for almost three months now while everyone waits for it to break out or break down.

In particular, focus on interplay between price and the 50-day and 200-day moving averages as you flip through the charts. You’ll often see ping-pong action as price bounces back and forth between the two major barriers. Not surprisingly, these pivots will provide interesting swing trades as long as you don’t overstay your welcome.

Davy and Goliath

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Conflicting patterns in different time frames trap many traders in very bad positions. These trend relativity errors occur when you see a great pattern but miss the larger support or resistance that’s going to screw up the trade. Avoiding this error is simple. Look above and below the entry price for the setup that’s catching your eye.

Then do the math. Realistically, how far can price travel before it runs into a major brick wall? If that number is less than 3 times the distance to your logical stop loss, avoid the trade entirely. This sounds easy, but marginal traders have a really tough time staying out of trouble with this pattern, because it looks too good to pass up.

Trend Mirrors

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What happened in the past has a major impact on what happens in the future, so look to your left before taking the trade. Trend mirrors point out all the past debris that will affect price movement right now and into the future. In particular, current action responds to pivots created by old highs, lows and gaps with startling reliability.

 

In truth, price reacts a lot more than it acts. In other words, prior reversals and gaps generate major swings during current price discovery. With this in mind, smart technicians gauge the adverse impact of all prior highs/lows, gaps, volume spikes, and candle shadows when they’re examining an interesting pattern right here in the present.

 

 

 
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Tuesday, August 16th, 2011 Education, ETF, Forex Trading, Stock Trading No Comments

10 Ways ETFs Can Grow Your Portfolio

Although they would not admit it, most portfolio managers take a core/satellite approach when managing their equity portfolios. The part of the portfolio that might mirror the overall market could be considered the “core” and the part of the portfolio that deviates from the overall market can be considered the “satellite” portion. When you hear portfolio managers say  they are trading around their “core” bank holdings - or they are currently overweight oil stocks and underweight technology stocks, or they have a small cap tilt to their portfolios - they are essentially taking the core/satellite approach.

Tutorial: Exchange-Traded Fund Investing

But what about the average investor? Exchange-traded funds (ETFs) provide an easy way of implementing a core/satellite approach. We provide 10 reasons why this strategy can trump securities-only portfolio management strategies.

What Does the Portfolio Look Like?
ETFs provide a simple way to implement a professional style approach to portfolio management. ETFs form the core of the portfolio and provide diversification. Then, you select individual stocks that are expected to outperform the benchmark to form the satellites around the ETFs. Typically, an investor might put 50% of his equity portfolio in an ETF representing a market index and 50% in individual securities. There is no hard and fast rule about the percentages, but the greater the percentage of the portfolio that is in the core holding, the more the overall portfolio will behave like the overall market.

10 Reasons to Consider a Core/Satellite Investment Strategy using ETFs
For investors who manage their own accounts, a core/satellite strategy combining securities and ETFs is often better than a portfolio of only securities for the following reasons:

1. Better Diversification
Typically, the average investor who buys stock tends to have a poorly diversified portfolio. There is often a concentration in sectors or types of stocks with very similar risk characteristics. Using an ETF to buy a core position provides instant diversification and reduces overall portfolio risk. (For more insight, read The Importance Of Diversification.)

2. Improved Performance
It is widely accepted that a large portion (more than 50%, by most accounts) of professional money managers underperform the stock market. The average individual investor typically fares worse. An investor who sells some stocks and replaces them with a broad-based ETF core holding may be able to improve the overall performance of the portfolio. (For related reading, check out Pump Up Your Portfolio With ETFs.)

3. Easier Rebalancing
A change in an investor’s asset mix is easier to implement when you use an ETF as the core position. If an investor wants to increase his or her equity exposure, the purchase of additional shares of an ETF makes it easy to do without having to buy additional shares for current holdings. (To read more on portfolio rebalancing, see our related article Rebalancing Your Portfolio To Stay On Track.)

4. Easier to Monitor and Understand
The more stocks in a portfolio, the harder it is to monitor and manage; after all, there are more investment decisions that have to be made and more factors to be considered. With an ETF or index fund representing a core position, the number of stocks can be decreased, resulting in a portfolio that is less complex and easier to understand.

5. More Tax Efficient
A portfolio containing all stocks tends to generate more trading activity as the market and investment outlook changes. With more trading activity, more capital gains will be realized and more taxes paid. ETFs are very tax efficient and, with a larger proportion of the portfolio in a single core ETF, fewer capital gains will be triggered. (Investors should consider the impact of taxes on their returns. Be sure to read A Long-Term Mindset Meets Dreaded Capital-Gains Tax for more information.)

6. Lower Transaction Costs
With fewer stocks, there will be fewer trades and fewer commissions. The small annual management fee ETFs carry is easily recovered from the savings on commissions. In an account at a full service broker, the reduction of commissions could be dramatic. This might be why many investment advisors do not like ETFs. (For more on ETF benefits, read Uncovering The ETF Wrap.)

7. A Decrease in Volatility
For the typical investor with an ETF representing a core holding, the overall portfolio will likely be less volatile than one made up entirely of stocks. (Learn to adjust your portfolio when the market fluctuates to increase your potential return in Volatility’s Impact On Market Returns.)

8. Allows For Better Focus
In any well designed and diversified portfolio, an investor will have to invest in sectors or stocks that he or she does not like, but is required to own for diversification purposes. Using an ETF for a core position provides the necessary diversification, allowing the investor to focus on stocks in his or her preferred sectors. (For more on sectors, read Sector Rotation: The Essentials.)

9. Can Implement Sophisticated Investment Strategies
Investment strategies such as enhanced index strategies, risk budgeting, portfolio insurance, style tilts, hedging strategies and tax loss harvesting become easier to implement with a core/satellite approach.

10. Improves The Knowledge of the  Investor
The proper implementation of a core/satellite strategy requires a certain degree of knowledge and understanding about risk, market indexes, benchmarks and portfolio management techniques. As investors gain the knowledge and experience of applying a core/satellite strategy, the process will, in the end, make them better investors

Conclusion
With the introduction of ETFs, the use of a core/satellite strategy becomes a very practical strategy for the average investor to implement. It will not only make investment management easier, but the underlying portfolio will also be better diversified and future performance will likely improve.

For further reading on portfolio management techniques, be sure to read Equity Portfolio Management Mechanics.

Read more: http://www.investopedia.com/articles/exchangetradedfunds/08/core-ETF.asp#ixzz1V7KV4EJz

Monday, August 15th, 2011 ETF, Stock Trading No Comments

Larry Connors: Bear Market Bounce or More Selling?

By Larry Connors | TradingMarkets.com | August 15, 2011 08:55 AM
 

 

In spite of the two-day rally, the overall market is in neutral territory because it was so oversold after Wednesday’s sell-off. The 2-period RSI of our Country Fund ETF Universe and the Main ETF Universe are both in the 60s.

Friday closed poorly. Even though the averages held into the close, many underlying stocks, especially the ones most sensitive to the economy, closed near their lows for the day. Today will be a be a sign of whether this was a just two-day bear market bounce if the market resumes its sell-off. This will be especially true if no negative news comes in and the market just glides down.

The one good thing this market has going for it is an extremely high level of fear and -skepticism. VXX is near 5 month highs and nearly every financial newspaper ran lead stories this weekend on how investors can protect their money going forward. Some of the products and ideas are a bit bizarre (for example those mentioned in this article in Saturday’s New York Times [http://www.nytimes.com/2011/08/13/your-money/asset-allocation/investors-find-new-ways-to-strategize-amid-volatility.html?pagewanted=all]) but everyone is looking for protection and that’s a good sign.

This week will again be dominated by news from Europe. If the Obama administration or the Fed had any solid plans, they would have showed their hands last week. On Thursday (right after Wednesday’s major sell-off) President Obama was in Michigan promoting green technology; this is his administration’s solution to creating new jobs and spurring the long-term economy (I wish I was kidding).

The above is from Larry Connors’ Daily Battle Plan.

To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.

And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.

Larry Connors is founder and CEO of TradingMarkets.com.

 
Monday, August 15th, 2011 Education, ETF, Larry Connors, Stock Trading No Comments

Larry Connors: Scared Money Puts Pressure on ETF Prices

By Larry Connors | TradingMarkets.com | August 10, 2011 09:00 AM
 

 

Yesterday’s battle of “the hedge funds selling everything” versus “the Obama administration needs this market to go higher” was won by the guys in Washington. Sometimes it’s good to see to see those guys win.
By Larry Connors | TradingMarkets.com | August 10, 2011 09:00 AM
Tags: ETF Trading, Larry Connors, The Daily Battle Plan
Yesterday’s battle of “the hedge funds selling everything” versus “the Obama administration needs this market to go higher” was won by the guys in Washington. Sometimes it’s good to see to see those guys win.
Obviously a slew of buy programs hit the market at exactly 2:45 pm on Tuesday and moved the major indices 6% higher in 75 minutes. I’m not fond of the game when it’s played like this, but it’s gone on for years (since at least 1987, possible even earlier). Now it becomes a battle of wills.
I expect early morning pressure on prices today due to all the scared money in the market place. Yesterday’s bounce will be viewed by many as their chance to get out. The key is what happens after the scared money bails. Does it trigger further fear, with selling leading to more selling? If it doesn’t, then the market will rally, likely substantially. Today is going to be key – a higher close will be a good short-term sign.
Overall the market will remain highly sensitive to any type of news (especially negative news). Once it starts ignoring the negative news, a longer-term bottom will arrive. Overall though, nearly all the major world indices are under their 200-day ma and that means volatility is going to continue. Please continue to use extra caution here, especially today.
The above is from Larry Connors’ Daily Battle Plan.

To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.
And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.
Larry Connors is founder and CEO of TradingMarkets.com.

Obviously a slew of buy programs hit the market at exactly 2:45 pm on Tuesday and moved the major indices 6% higher in 75 minutes. I’m not fond of the game when it’s played like this, but it’s gone on for years (since at least 1987, possible even earlier). Now it becomes a battle of wills.

I expect early morning pressure on prices today due to all the scared money in the market place. Yesterday’s bounce will be viewed by many as their chance to get out. The key is what happens after the scared money bails. Does it trigger further fear, with selling leading to more selling? If it doesn’t, then the market will rally, likely substantially. Today is going to be key – a higher close will be a good short-term sign.

Overall the market will remain highly sensitive to any type of news (especially negative news). Once it starts ignoring the negative news, a longer-term bottom will arrive. Overall though, nearly all the major world indices are under their 200-day ma and that means volatility is going to continue. Please continue to use extra caution here, especially today.

The above is from Larry Connors’ Daily Battle Plan.

To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.

And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.

Larry Connors is founder and CEO of TradingMarkets.com.

 
 
 
 
Wednesday, August 10th, 2011 Education, ETF, Larry Connors, Stock Trading No Comments