Profitable ETF Trading Strategies: trade like Ted Williams hit baseballs

There is general agreement that Ted Williams was the greatest hitter in the entire history of baseball.

He brought a science to the practice of hitting, a committment to  the informed  practice of his craft, a deep understanding of his strengths and weaknesses as a hitter. These combined with his natural physical ability to produce a hitter whose like will probably not be seen again.

I want to focus on his approach to hitting and his keen insights to his craft which I think directly apply to our craft of trading.

Williams studied every at bat and every swing, and developed a matrix of his personal strike zone which showed what his average was in every region. His strike zone measured 7 baseballs wide by 11 baseballs tall.  Knowling his average for each of these areas helped him abide by his first rule of hitting:  swing at good pitches. If you chase bad pitches then that’s what you will get from professional pitchers.

He advised that you also had to do your homework:  preparation gets your mind right. I equate this to our preparation phase of trading, which includes knowing the market classification, the patterns that are working, the oversold or overbought condition in the short term, amd the specific volatility statistics of the market and our preferred targets.

Williams’ final piece of top level advice was to be quick with the bat. Being quick in action means you can wait a bit longer to commit, you will be fooled less, and you will be  more confident in your execution. We can apply this advice by streamlining our decision making process by rehearing, by reducing our required information to the minimum needed to act, and by anticipating  events in order to have a plan of action worked out ahead of time.

It’s remarkable how similar the keys to high performance really are between different fields of human effort.

Profitable ETF Trading Strategies: the best book on trading

A friend of mine who is seeking to develop his skills as an equity trader asked what book on trading he should read if there were only one.

I started to think about the different masterpieces I have read and have applied in my own trading.  There are masterpieces of fundamental analysis, of technical analysis, of trading technique, and investing strategy out there. It was a daunting task to settle on just one.

When it finally hit me, though, everything fell into place. There is one book that is so powerful that it stands out head and shoulders above all others to such an extent that it is not even close.

It’s a book that has a direct effect on the trader no matter what style, time frame or technique is being applied.  It works for men and women, for any kind of trader in any kind of market.

Its’ a book that bears reading and re-reading and will always allow for new insights and nuances.

It’s a book that adapts to you and your emerging style.

It gets better the more you use it.

It’s not cheap but it IS free.

It will reward you based on the amount of time you put into it. It will perfectly mirror your needs of the moment and help you find your strengths and weaknesses.

You can buy it in any store that sells office supplies, and while there is only one edition, it can fill many volumes.

It tells many stories, and the plot will often change before your eyes. It will take you to places you never imagined, although there is a thread of familiarity that ties everything together.

In short, it contains everything you will need to be successful as a trader if you put the time and effort into it.

Naturally, I am speaking of your trading journal, an intensely personal unique approach to how to trade the markets.

I’d suggest that the time and effort you put into refining the craft of journaling and reflection will be directly proportional to your continued success as a trader.

So, if there’s only one book for you to read and study as a trader, that’s the one.

Profitable ETF Trading Strategies: the power of stories

Trade like a storyteller

We know from cognitive science and learning theory that humans are storytellers by both nature and nurture. Knowing this about how our brains are wired can help us in a couple interesting ways as lifelong  traders and learners.

Generally it is easier for most people to learn when the new information is presented in the form of a story. Therefore, when you are looking for new information about how to trade effectively, you would be well served to attend to the stories the treacher tells, and check to see if the story resonates with you.

If you can’t “get” the story, it will make it very difficult if not impossible to make sense out of the details.

If you “get” the story though, you have a storyline that acts as an organizing structure or “schema” for you to atatch the new data to.

The best stories for learning are real, short, interesting and human. That makes it easy to see how the new information can apply to you. For teachers, this means that you will improve your practice by adding short, sharp, engaging stories of real people in similar situations to where your students will be heading in the future.

Your stories will be even more powerful when they touch the emotions and provide an incentive to acheive a favorable emotional state. That’s why most of thepowerful selling techniques tell a story about a very desireable emotional state that can be achieved if only the customer will exchange money for the magic bullet.

As traders, you might consider trying to develop the “story” of a stock or an Exchange Traded Fund. By proposing a “storyline” that the target “could” follow, you can then identify price points wherre the storyline is violated and you can exit quickly because the target is following a different path or script.

There are extraordinary  possibilities for improving your trading and learning performance by appreciating the powers of stories. Can’t you just imagine it!?

We know from cognitive science and learning theory that humans are storytellers by both nature and nurture. Knowing this about how our brains are wired can help us in a couple interesting ways as lifelong traders and learners.

Generally it is easier for most people to learn when the new information is presented in the form of a story. Therefore, when you are looking for new information about how to trade effectively, you would be well served to attend to the stories the teacher tells, and check to see if the story resonates with you.

If you can’t “get” the story, it will make it very difficult if not impossible to make sense out of the details.

If you “get” the story though, you have a storyline that acts as an organizing structure or “schema” for you to attach the new data to.

The best stories for learning are real, short, interesting and human. That makes it easy to see how the new information can apply to you. For teachers, this means that you will improve your practice by adding short, sharp, engaging stories of real people in similar situations to where your students will be heading in the future.

Your stories will be even more powerful when they touch the emotions and provide an incentive to achieve a favorable emotional state. That’s why most of the powerful selling techniques tell a story about a very desirable emotional state that can be achieved if only the customer will exchange money for the magic bullet.

As traders, you might consider trying to develop the “story” of a stock or an Exchange Traded Fund. By proposing a “storyline” that the target “could” follow, you can then identify price points where the storyline is violated and you can exit quickly because the target is following a different path or script.

There are extraordinary possibilities for improving your trading and learning performance by appreciating the powers of stories. Can’t you just imagine it!?

Profitable ETF Trading Strategies: adapting to a changing market

The market goes through changes all the time, as market participants and their methods and objectives change through time.  Sometimes trend following will dominate, sometime reversion to the mean trading will be effective, other times channel trading with strict profit targets will work.

It is normal for traders to develop preferred methods of training, based on our experiences and our preferences, and our style of trading and our chosen markets. It is normal to have periods of time when your preferred methods are especially effective, and other times when it is heavy sledding.

As market conditions and patterns change it is normal to see a change in how effective our chosen methods perform. Since market conditions change in unpredictable patterns and over changing periods of time, it is never easy to formulate rules that govern how to navigate these transitional states.

If you are looking to be a full time trader, you can expect to have to routinely sense and adapt to changing market conditions on a regular basis. It is worthwhile then to develop a mind set that expects this kind of routine change, and a system to routinely manage the transitions.

Here are some things you can do to help you stay in tune with a dynamic market

1. Reduce the frequency of your trading so that you only trade patterns that strictly meet all of your preferred criteria.

2. Trade at reduced risk levels  and reduced size until a new pattern of performance emerges.

3. Monitor the moving average of your trade results to be alerted to reduced performance quality which can signal a change in market conditions sooner than is evidenced in individual technical indicators.

4. Have a variety of systems and strategies that are known to outperform in certain market conditions, so that your action plan adapts to a changing market.

5. Use adaptive risk measures that fine tune your system so that your system parameters remain routinely aligned with market conditions.  Having trailing stops that are a function of Average True Range (an adaptive market indicator) is an example of this kind of adaptation.

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.

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.

Profitable ETF Trading Strategies: 5 ways that trading like a gardener will improve your results”

Gardening is a hobby,  a craft  and an art when practiced at the highest levels. It helps develops habits of mind and healthy attitudes towards your daily work that can be of great benefit in the high stress world of short term trading.

Here are 5 things you can learn from gardening that will help you to become a more effective trader.

1. The importance of design: A good design for gardening and for trading begins with the end in mind. You start with a vision of a successful end-state, and keep that firmly in mind as you proceed with  monthly, weekly and daily plans to achieve your shorter term goals.  By keeping the end in mind, your daily tasks and actions will be aligned with your ultimate purpose, both as a gardener and as a trader. It forces you to consider the longer term view when you feel rushed.

2. How to cultivate patience: Crops grow according to their own nature and in their own time.  They can’t feel your impatience, and you quickly realize how foolish it is to try to force your will upon something that is unmoved by your timetable. The market is like that too, moving according to its own nature and schedule.  Learn to feel the market rhythm and adapt your expectations and behaviors.

3. Appreciate the importance of timing: although  we can’t rush the growing season, there is nevertheless a time for all things.  Plan and prepare when it is time to do those things. Stalk when your targets are getting close,  enter when it is time to act, and exit when your objectives are met or your rules indicate.  Do things ion their own time and according to plan.

4. Know your natural limits: Know what your strengths and weaknesses are. Plan and implement a garden you can live with, and manage, and grow with; one that suits who you are. Your trading plan should be a reflection of your strengths and weaknesses too, so that you can reliably be just who you are.  It’s very diifficult for the leopard to change his spots or the trader to change his ways.  Learn to work within your strengths and offset your weaknesses with a good plan.

5. Know the seasons and your crops: By knowing your markets you will be able to align your objectives with what your preferred markets can be relied upon to provide,. Don’t ask markets and targets to do more than they naturally can or you will be forced into taking improper risks.  Don’t put yourself in the position of arguing with the weather or Mother nature. Know your business and know your markets.

Trade like a gardener to improve your peace of mind and your bottom-line results.

Profitable ETF Trading Strategies: trade like an autobahn driver

Support and resistance levels create congestion zones around certain price levels. In congestion zones, there is no clear indication if the follow-on trend will be either up or down, as bulls and bears are wrestling with each other for control of price.

A congestion zone on a chart occurs when price is moving sideways, and there is no clear trend up or down.  It is not unusual to see days and days of sideways movements on daily charts.

There are times when price has cleared a congestion zone by either breaking out to make new highs or by failing and falling quickly back towards lower price levels.

Adapting your trading strategy to these different conditions can be improved by having a useful trading metaphor or organize your thoughts and remind you of how to interpret price action.

A good trading metaphor should be aligned with your primary learning mode: visual, auditory or kinesthetic.  The best metaphors find a way to incorporate all 3 modes, to reinforce the power of the story and the underlying organizing principle.

One of my favorite metaphors does just that:  Drive like an Autobahn driver.  Here is how it works:

The autobahn in Germany is a marvel of engineering and freedom. For vast stretches of expressways between major cities, you can drive at unlimited speeds.  There are multiple lanes, traffic is spread out, and you can see clear road ahead for miles.   Driving here is like trading a breakout where you get onboard early and are swept along by the unconstrained power of buyers everywhere, all pushing price ahead at great speed.  Enjoy the ride for as long as it lasts, but be conscious of traffic ahead and the inevitably city ahead which will add to traffic and necessarily slow you down.

The autobahns around cities can be very dangerous, and conditions can change swiftly, especially in times of bad weather.  Traffic increases, road surfaces get slippery, there are many more exit and entry ramps with both local and long haul drivers each seeking to accomplish their purpose on the road.  Not everyone is there for the long haul.  People change lanes rapidly trying to gain a momentary advantage which leads to choppy traffic patterns which are unpredictable.  This is like trying to trade in congestion areas.

You cannot expect to apply a single set of simple rules to both kind sof road conditions or both kinds of price areas.  To be safe and productive, you must adapt your rules to the conditions of the road or the trade.  Drive and trade the wide open spaces in one way, to maximize your profits and save time when the conditions warrant such technique.

Drive and trade carefully and in a risk managed way in congestion areas if you must drivce or trade at all.  Don’t be hesitant to pull over and let traffic clear before you re-engage. We have the freedom to trade when and how we will and we will be rewarded by waiting for our most favorable conditions to try our hand.

Know what the road ahead is going to be like! Read the maps!  Listen to traffic and weather  reports and pay attention to the traffic around you to guide you safely and profitably.