Profitable ETF Trading Strategies: paying attention to market pivot points

To extend the metaphor of “Trading is like Driving” a little further, you could think of the market’s pivot points to be like lanes on the highway.

When you are driving on the Interstate or even just in town, the lane markers have come to take on an important meaning ion the minds of every driver ion the road.  This meaning is something created out of the minds of drivers everywhere and acted upon as if they are true, not because of any intrinsic meaning inherent ion the lines themselves.

Behavior of drivers changes as they approach lane markers, not because the strips of paint have any physical ability to affect the motion of the car or truck, but because the mental model of driving is so firmly ingrained in the minds of all drivers.  The lines act as if they constrain the movement of traffic within their boundaries.

An observer from Mars might wonder what magic powers these lines of paint have, but the magic is in the mind.

In the same way, pivot points affect trader decisions on a daily basis in the trade of  the broad market (and by this I mean the S&P 500 and its ETF, symbol SPY).

Pivot points, briefly, are support and resistance levels calculated by traders in the futures pits who use these as reference points to judge the theme of the day and make decisions about how to buy and sell the  ebb and flow of prices throughout the day.

As price approached these pivot points. Price tends to converge and go into a congestion zone of backing and filling. Breakouts from these pivot points can be volatile and fast and can offer the best reward to risk ratios of any trades during the day.

Because large cap stocks and ETFs that track broad market regions and sector trade with a such a high degree of correlation with the broad market, it is a definite edge to the agile trader who can monitor the relationship of his preferred target of the moment to the broader market movement during the day.

When there is high correlation, you will be able to see whether your target or the market itself seems to be making the first move. Once you identify the leader, you can trade the follower more safely, since the leader, where you have no money at risk will give you a heads up on likely moves in your preferred target in the near future.

Many times this early warning can be a couple minutes or as few as a couple seconds. In any case that is enough edge for you to dramatically improve your bottom line in the conduct of the daily trade.

Bottom line; pay attention to pivot points if you are trading large caps and broad ETFs.

profitable ETF Trading Strategies: trading large cap stocks and broad ETFs

There are a lot of reasons to trade large cap stocks and the exchange Traded Funds (ETFs) that track the broad sectors and regions of the world. It’s not without its tradeoffs, but for a lot of new traders it can make a lot of sense.

You will have to give up the goal of catching the next Google or Microsoft as a small cap which, against all odds, rockets to the very top of the market food chain.

The trade off is worth it for some people because of the following kinds of advantages that you get by focusing on the largest companies in the world and the broadest regions.

The advantages include:

1. Very narrow bid-ask spreads. This is the difference between what buyers are offering as their best buy price  and what sellers are offering as their best sale price. By minimizing the slippage between the bid and the ask,  you will not be penalized as much as you might be on a thinly traded stock or ETF where the bid-ask spread can easily be 10 to 20 times wider.

2. Liquidity: because of the enormous size of their market capitalizations, it is very hard for these companies to go bankrupt overnight. It can happen of course, but remember that the fall from grace of GM and Enron played out over many months, giving agile traders many opportunities to either protect them from harm or to profit from their fall.

3. Analyst coverage: because of the sheer size of the companies and the institutional interest in them, you can be sure that large cap companies have plenty of analysts covering their every move. You can debate on the merits and quality of analyst coverage, but if that is where you perceive your edge, then large cap companies have many analysts to choose from.

4. Institutional money must buy large caps in order to get fully invested and meet the fiduciary requirements of their stated investment strategies.  Some of these institutions are so large that they simply must focus their buying and holding on large capitalization stocks, and so you can be sure that there is always a buyer in size out there somewhere to act as a cushion of safety for you.

5. Orderly behavior: because of the sheer numbers of interested buyers and sellers, large caps tend to trade in an orderly manner throughout the day and because they trade in tandem with the broader market to a large extent, you can effectively monitor positions with less concern over intraday volatility catching you by surprise.

There are as many styles of trading as there are traders.  Trading large cap stocks and broad ETFs though is certainly a way that should attract many new traders looking to begin mastering the craft.

Profitable ETF Trading Strategies: Trade like a defensive driver

I was giving my teenage daughter some advice about how to survive on the road. As a newly licensed driver, she was naturally apprehensive, because this is a brave, new world for her.

As I heard myself giving her guidance from 35 years of successful driving experience, I was struck by how similar it was to what I try to share with people who are beginning their journey as traders.

Here are some common points to consider, as you look to incorporate perspectives that have served you well as a driver into the equally exciting, dangerous and yet rewarding world of trading

1. Half of the other drivers are below average. Some of them are also drunk, crazy, stupid, preoccupied, unstable, distracted and some are about to suffer a heart attack.  Never project your own state of mind onto the person taking the other side of the trade. Just assume they are capable of doing the most extreme and surprising behavior at any time.

2. Disaster is waiting just around the corner, and if you are prepared, alert and ready, and your equipment is serviceable, you just may have an opportunity to make a difference if you keep your wits about you.

3. When you are driving, drive. Be in the present. Pay attention to what’s happening and also to what else might be happening.

4. Don’t drive when you are disturbed, crazy, drunk, sleepy, unfocused, angry, or otherwise occupied. Know when you should not be behind the wheel. If there is any doubt in your mind, don’t drive, don’t trade.

5. Keep your equipment inspected, serviceable and complete with redundant safety measures.

6. Know and respect the rules of the road, and the market.

7. Don’t chase, don’t race, don’t drive like it is there for you to have fun, although there is a certain enjoyment and satisfaction available when you drive well and everything is fine. Just don’t forget your purpose is to get to your destination in one piece and unharmed, and without having caused harm through negligence or inattention.

8. Always have an out. Know where your safe spot is whenever you are driving; Which direction will you go if something happens NOW and you must make an instant decision.

9. There are times when the road and weather conditions are more important than your purpose in driving right now. Know and respect your limits, you can go there tomorrow.

10. Know where you are going and why, and the different ways you can get there. Monitor road conditions along the way and give yourself room for surprises and detours. Don’t drive until you are on the edge of empty. Take breaks and keep your reserves topped off.

11. Always buckle up, because there’s one coming that you won’t be able to see despite your best efforts.

12. Old traders didn’t get to be old by being dumb.

US will soon be unable to relyt on the kindness of strangers

The rest of the world will apply the fiscal discipline to us that we can’t develop on our own.

eventually people get tired of giving the drunk money, and he either gets clean out of necessity or turns to a life of crime.

Higher taxes, or reduced federal benefits and services – or a combination of both – may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year – the largest federal spending category after Medicare-Medicaid, Social Security and defense. It’s quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

Palin’s false choice

“Many just accept that lame duck status, and they hit that road,” Palin said. “They draw a paycheck. They kind of milk it. And I’m not going to put Alaskans through that.”

So the only choice she sees is quit or be a lame duck? how about doing the job she was elected to do in spite of friction and politcal games. Does she think any elected office is any different?

Is that the kind of “stick-to-it- iveness” she’d demonstrate as a President?

How about enduring the slings and arrows in order to serve? If it’s too hard as governor, what would she do as president?

She is already a footnote, diminishing by the day.

“How sad that Washington and the media will never understand; it’s about country,” the statement said. “And though it’s honorable for countless others to leave their positions for a higher calling and without finishing a term, of course we know by now, for some reason a different standard applies for the decisions I make.”

Save it for your tell all book, and the safety of a circle of your die hard supporters.

Admiration for Andy Roddick

has a great career, a great wife, world class skills, more money than he can spend, and nothing to prove. he is comfortable in his own skin and ihas a career that will stand the test of time.

And he still has the courage and grit to get out there and play the match of his life against the greatest player ever

Federer is the greatest i ever saw play, but he strikes me as just a little too impressed with his own greatness. I mean a nice little european-style faux fu manchu jacket with a golden F and a gold threaded 15 on the back?

just a little too much in love with the awesomeness that is himself. you are a great player Mr Federer, but a little less self congratulation would go a long way

Biden discovers that the economy is worse than anyone thought

naturally, this is something they inherited.

In other news, water is wet.

Surely the next thing is to jump on the Krugman bandwagon and spend more money that we dont have. No policy recommendation coming out of these clowns has any recognition that if they are wrong on their presscriptions that we have committe an unrecoverable error.

Shouldn’t Biden’s admission of lack of foresight be evidence that they cant be trusted with even more money?

Centralized solutions make the oscillations wider and wider until the center of gravity can no longer support the structure.

we need less government intervention not more.

Never mind, keep giving the drunk more money, all he needs is one more bottle to fix his drinking probelm

Powell discovers Obama is spending too much money and growing the size of government

But dont worry, he has been talking to some people in the administration about it.

Typical Powell: now he discovers his concerns about the growth in the size of government and sagely reminds us he has spoken to several of the people in the administrtaion about his concerns.

In other news, Powell is concerned about the stripes on a tiger and intends to mention it on his next safari. CYA.

But he balanced this insight with a warning to stop picking on Sotomayor, keeping his enlightened conservatism credentials intactf. lapdog

Palin: good riddance. can we get serious now?

Palin was the gift that kept on giving to the democrats.  If she thinks the press is unbearable now, when she is a sideshow attraction, imagine the pressure she and Todd would have when all eyes are freally focused on her.

She can barely string 3 coherent connected sentences together.

Quitting now  gives the Dems all the ammo they would ever need.  She is so polarizing that it is impossible to think of her actually convincing a single voter to change their mind unless they were already a member of her rabid following.

It’s a sign of how far the Republicans have fallen that she is being given serious consideration as the One. She is Joan of Arc without the grace.

On what planet can quitting the governorship be spun as the sign of deep strategery?!

I weep for conservatism. Buckley and Ben Franklin are spinning in their graves. The end of the Republic is here.

She would make a great mayor no doubt, but it takes a different kind of person to be able to thruve in the rough and unforgiving tumble of the national scene.

The sooner she disappears onto a fox channel talk show like that goober Huckabee the better.

Profitable ETF Trading Strategies: Start with the basics

A friend of mine, frustrated at the pace of his progress, asked how he could gain and maintain momentum on his personal journey towards trading mastery.

Here are my thoughts:

I would start with the daily tasks of trading and get the procedural parts down.

At the same time, I would suggest weekly evaluations of trades and moving averages of SQN rather than streaks of daily profitability.  Based on the frequency of trading, there aren’t enough trades in a day to be statistically significant in order to say that there was something wrong with the way you are trading.

Let’s say you had 4 days in a row where the market had bounced off Williams%R oversold levels and was flowing upwards.

Suppose, then,  on the 5th day, the set ups that were working well, now are marginal, and u finish the day down -.5R, with “R” defined as your unit of risk in dollars per trade.

If you are too strict on the daily rulesets , you’d be thinking you did something wrong and need to change dramatically, whereas you are just within the normal performance measures for that style

Having said that, I will say that was a good idea for me to have daily profit goals to go hand in hand with the procedural goals.

My daily objectives are two-fold and are related: trade professionally AND make money.

Evolving from those two objectives, came my idea for the bullets and feeding the dog first everyday.  Those 2 techniques actually support both objectives.

They are a disciplined set of rules for money management and they also increase the probability of meeting my daily goal of feeding the bulldog.

I would recommend that you have a daily log sheet of trades taken, and why,  and grade them along with a daily R net, and a daily $ net.

You really want to be net positive for a week and a month as a goal, rather than every single day, because a week and month you now have enough trades, probably, in order to examine performance statistically and systematically.

These are ideas that come from statistical process control, where a fundamental principle is that you must have enough data points from a standard system to judge whether or not it is in control.

Until you have enough data points and a controlled system, you cannot reasonably make changes, because you have not established a baseline in order to proceed with analysis for insight into cause and effect.

So, the 12 tasks of trading, the debriefings, the trade logs , the reviews of performance, all are designed to standardize your approach in order to allow meaningful performance management.