Profitable ETF Trading Strategies: a reflection on trend following
Trend following is one of the most powerful practical trading strategies available to you as an individual trader. It is suitable for multiple time frames and multiple markets. In a very real sense, all trading strategies regardless of time frame incorporate some aspect trend following except for purely random entry systems.
In my own personal strategy I employ trend following in several ways:
On a weekly basis I analyze market conditions to determine what percent exposure to the markets for the following week I should have. If market conditions permit me to expose money for the week ahead, I will then allocate the appropriate amount of money into the strongest trending ETF sectors. I will use a trailing stop from the highest high while in the trade in order to preserve profits and perfect capital.
I defined the strongest of the strong ETF’s with a composite measurement of strength, consistency and volatility lesson blended into a single metric.
This exit strategy will certainly give back some profits but is a disciplined way of ensuring that I don’t exit positions too soon. It also waits to see the far side of the hill before it sells to preserve profits.
In a longer term passive asset allocation strategy, I am fully invested in a diverse set of low correlation asset classes as long as the market trend is positive, as defined by the relationship between price and the 200 day moving average. In a sense, this is trend following related to the markets overall trend. When that trend is negative, defined by price less than 200 day moving average, then I am out of a position and fully in cash.
The strategy could incorporate going short the market once the bearish trend is established on price weakness. In my personal strategy, however, I go after profits on the short side in a different manner.
In the shortest time frames strategies for trading, I am looking to capitalize on intraday trading prices in high probability setups in order to make more reward than risk in the shortest possible time.
It is fair to say that I am really looking to trend follow in all time frames that I trade.
Michael Covel’s book on trend following is the best single resource I have found on this topic. I also like Dr. Elders triple screen pattern to find high probability, high payoff opportunities in strong trends.