Profitable ETF Trading Strategies: Good traders know and exploit their edge
As an individual trader, you must be absolutely clear about where your edge is in the market place so that you can ensure your trading strategies are designed to put you into positions where your edge can make the difference against the average market return.
Let’s be clear too: your edge must give you a reliable means of achieving better than average market returns or you are much better off simply buying and holding lowest cost broad market index exchange traded funds. To do otherwise would be a waste of your time and get you a lower than easily achievable returns on your capital.
When I consider institutional traders, I see their advantages in computing power, depth of fundamental research, administrative trading cost efficiency and legitimate inside information, I quickly conclude that there is no way I can find an edge by trading in direct competition with these organizations on a fundamental basis.
This means I am going to steer clear of situations where my edge would consist of having a better understanding of the fundamental business model and market opportunities of individual firms. The fact that so many businesses go out of business due to misjudgments of market conditions when led by experts who have a made a career out of narrowly focusing on that line of business suggests to me that I can not hope to have an edge in fundamental analysis.
I also know that I am not capable of scalping better or market making better than brokerage houses who are fighting for fractions of pennies on large volumes in time periods measures in fractions of seconds. So I will stay out of that trading environment as well.
I know that I need enough opportunities to allow my statistical edge in trading to manifest, and so I cannot afford to have overly long holding periods and wait for the ship to come in. I believe I need to be like Walmart and trade in quality merchandise that everyone wants, take my decent profits quickly and cycle through inventory efficiently. I want to be the swing middle man helping the market achieve orderly distribution.
This leads me to look for my edges in the swing trade time periods of 1-5 days, and looking to lock in profits and/establish no-lose positions as early as possible on the entry day, and only hold overnight when I have clear indications that the extra overnight risk is justifiable.
Know your edge and stay within your area of competitiveness.