Profitable ETF Trading Strategies: Sector Contrarian
There is a new conventional wisdom beginning to emerge from the stock market these days and it says that there’s no way you can make money in a bear market unless you have the good fortune to be an expert market timer and bet against the recovery of the broad market. While it is true that having a sense of market timing can improve your bottom line, that’s not the only way to take advantage of the current turbulence. By paying close attention to a select group of exchange traded funds that represents important business and commodities sectors in the global market, an astute trader can find very reasonable trades with favorable reward to risk ratios which offer a way to trade these markets effectively.
Here is an example in oil, which can be traded using an exchange traded fund with a symbol of USO.
Go to any web-based free stock market charting website, like Yahoo finance and call up a 15 year chart on a barrel of oil using monthly candlestick charts.
You will see that this commodity trades in long powerful swings that can last months at a time. You will also see that at crucial turning points the reversal of the trend can be swift and violent. This means that to trade this exchange traded fund effectively, you must be alert to where we are in the current trend and be alert to the possibility of turning points at critical price levels.
Currently, we are near the bottom of the most violent selloff in the shortest period of time that oil has experienced in the last 15 years. A barrel of oil recently traded for under $30 a barrel while only a few months ago it was trading near all-time records above $130 barrel. A selloff of this magnitude is an indication of a market overreaction, where emotions have gotten in the way of rational judgment. This is entirely normal and should be expected.
In the last few days however, oil has put in the intermediate bottom and is prepared to make a traders reversal to the upside. This move is supported by the news of increasing violence between Israel and Hamas, coupled with a recent decision by OPEC to reduce oil production in order to bolster the price of barrel of oil. Taken together, these facts all point to the possibility of a short term rise in the price of apparel of oil of 10 to 20%, while the recent price reversal offers a definable support level at $28 a barrel. This is a reward to risk ratio of greater than four to one, and an astute trader can begin a buying program whenever he sees the price of oil actually going up during trading hours. This provides an additional level of security for short-term trading.
If you examine the behavior of the price of oil after the market opens you will see that in the last 200 trading days price moves in the direction of the opening gap. So, if you see oil gap up there is the good probability that it will close higher than the open that day. Conversely, if oil gaps down then you can expect the price to be lower by the end of the day. This relationship is not always so readily apparent in oil nor can it be used as a simple rule for any other exchange traded fund. Only by constant attention and analysis can you discover these kinds of tradable trends emerging from today’s volatile stock market. The rewards for this hard work make it worth the time for disciplined, pragmatic trader.
By looking for these kinds of favorable reward to risk ratio trades, a short-term trader is able to take advantage of today’s volatile stock market in a risk measured way that makes a lot more sense than simply dumping money into a passive mutual fund and hoping for success. Naturally, you must do your own due diligence and take personal responsibility for your results. Good trading!