6 Simple (But Important) ETF Trading Tips<br><br>
With the numerous and growing number of benefits that ETFs offer, its not surprising that the exchange-traded structure has become one of the most popular vehicles of choice for many traders.
Despite their cost-effectiveness, transparency and relative ease, there are a number of mistakes investors make when trading ETFs.
The growth of the ETF universe has spawned a number of ways to tap into a variety of asset classes that were previously out-of-reach for mainstream investors.
Still, these relatively new financial instruments are far from foolproof and there are plenty of ways investors can make mistakes.
Here are six simple ETF trading tips every investor should remember.
Source: ETF Database
1. The Trend Is Your Friend<br><br>
A trend is simply the prevailing price momentum for a given security. In other words, this is the general direction of where an ETF is headed. The trend being your friend simply means that you are better off sticking with the prevailing direction of the ongoing trend (whether it is up, down, or sideways), rather than going against it.
For example, during a bull market it is recommended to look for opportunities to establish long position, instead of speculating where the so-called top is. Likewise, when markets are uncertain and headed downhill, it makes more sense to look for an opportunity to establish a short position or simply stay out of the market rather than try and fight the downtrend.
2. Trade For Free (When You Can)<br><br>
Obviously, it pays to shop around before buying into a position. By opting for a commission-free ETF, you can truly maximize your profits by nixing the transaction costs associated with your trades all together.
3. Timing Is Critical<br><br>
Why?
Because stocks and ETFs alike tend to see relatively higher trading volumes in the beginning and end of the trading session and not as much action midday.
Higher trading volumes are certainly not a bad thing, however, increased trading activity translates into higher volatility which means wider bid-ask spreads.
According to ETF expert Ron Rowland, this pattern can work either for you or against you. If youre trying to move a big quantity of shares, you probably want to take advantage of the depth present in the last hour. If you want to trade against someone who may not have thought ahead, you might find some good prices at lunchtime.
4. Take Advantage Of Limit Orders<br><br>
For example, lets say you have a limit order to buy XYZ at $99.50 a share and it is currently trading at $101 a share; your trade will not be executed until XYZ dips to $99.50 a share or below. Likewise, limit orders are also useful in locking in profits, especially when you are unable to be constantly monitoring your positions.
When using limit orders you define the price you are willing to pay or sell at. As such, your order may not get filled right away as a market order would, but odds are that you will get a better price by being patient and waiting for the given ETF to hit your intended price target.
5. Use The Right Tools<br><br>
On the other hand, for ETF traders, factors like average daily trading volume and the availability of options trading are much more relevant. The ETF universe is filled with all sorts of tools, so its important to do your research and pick the one that best suits your needs.
6. Plan Your Investments and Invest in Your Plan<br><br>
For example, think of a leveraged ETF as a chainsaw; this product is perfect if you are looking to cut down a tree. On the other hand, if your goal is to slice bread, this sort of tool will more than likely leave you with a handful of injuries.
Also see:
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