Since 2007, ETFs have become the new “hot ticket item” among investors and traders alike in today’s marketplace. Growth in the ETF markets is outpacing many other sectors in the stock market as more investors pile their portfolios into what they believe is a “safer” investment vehicle.
Imagine their surprise when they discover ‘safe’ actually entails higher risk than they expected!
The truth I’ve discovered is that many people investing in ETFs are still losing their money over time. They may not be losing as much, due to the reduced stock specific risk in ETFs; but they are still coming out on the wrong end of their trades.
I believe there’s a deep misconception around ETFs: and I’ve outlined the five reasons I’ve learned most people are not successful when trading ETFs.
As well, I’ve outlined specific examples of the smart way to approach trading ETFs to help you overcome the challenges in today’s market.
Let’s look first at what so many traders do wrong with ETFs:
1) Investing / Trading the “Wrong Way” utilizing an outdated & obsolete “buy and hold” approach
The buy and hold theory is flawed for two primary reasons; first, it assumes that you can’t properly time the market (entry & exit points). Second, it assumes that the market will consistently grow on an annual basis. If there’s one thing that we’ve all learned in the past decade, it’s that the markets don’t always go up and more often than not they crash…sometimes in a very BIG way.
2) Trading with an incomplete method (or worse yet, no method at all)
Investing and trading, much like professional sports is all about execution around a specific game plan. If you don’t know what your edge is or what your limits are, then you’re not actually trading at all, you’re simply gambling.
3) Going after profits first and thinking about risk second (if at all).
Losing traders & investors let their “Greed” get the best of them. They get so enamored with the potential windfall that they start taking unnecessary risks.
4) Trying to capture entire market moves
The only way that a trader or investor is able to capture an entire market move is by sheer luck. There is just no clear definable strategy or indicator to pinpoint these exact positions on a chart.
5) Trying to trade in every market regardless of condition.
Not every market is ripe for trading. Non-deliberately trading markets greatly reduce the traders’ chances for success because market movement is indistinguishable. The best trading method in the world will yield little to no results in a market like this because the odds of success are stacked against you. It’s not your trading style…it’s simply the market.
To correct these mistakes, let’s look at how you can change the way you approach your trading – and this isn’t limited to ETFs, but I’m beginning with ETFs due to the overwhelming demand being created in this market.
1) Investing / Trading the “Right Way” in an action oriented, engaged approach
To avoid the pitfalls of the “buy and hold” investing strategy I recommend a more engaged approach to investing. An active investor does have the ability to gauge when they should enter and exit a market. It’s simply a matter understanding how the market is currently moving and knowing the right time to get into and out of a trade. All of which can be learned through proper education, disciplined trading and practice.
2) Utilizing a complete method
A professional trader knows the next move that he/she will make is based on market activity. Trading ETFs, or any market for that matter, is all about setting yourself up to win, getting the odds in your favor before investing, and managing risk tolerance while in the trade. A sound trading strategy will employ at a minimum four primary points:
- Specific Setup Conditions
- Entry Rules
- Initial Stop Rules
- Exit Strategy Rules
If your trading strategy does not employ these four components at a minimum you need to reevaluate your strategy because your risk exposure is too high.
2) Risk management first, trading second
Professional traders know that if you want a successful career in trading, risk control has to be the first component of your trading strategy. When you trade with a risk management strategy, you shield your portfolio from undue, potentially huge losses.
Moreover, there is an understanding of how much loss may be incurred before the trade is ever placed. This understanding of the potential loss, leads to the acceptance of the risk and ultimately removes all emotion from the decision making process. If you can remove emotion entirely from the decision making process, you chances for success are greatly improved as are potential for profits.
3) Trading the “Sweet-spots”
Rather than focus on major market movements or events caused by news events, I recommend trading the sweet-spots of a move. These are the middle one-third of a market move. When you go after the middle one-third of a market move, the probability of being able to know the direction of the prevailing trend is substantially higher…This gives you a trading edge.
4) Trade deliberate markets
Deliberate markets display a clear identifiable pattern in their movements. You can confidently make a trade within these markets because you know that they odds are in your favor that they will continue to move accordingly. These are the markets where your trade and investment dollars will do the most work for you. The key, obviously, is to know when to get out and/or the movement pattern has finished.
The difficult part for a trader / investor who is looking at moving their skill set to the next level is the time and effort it takes to learn and practice the discipline. Traders / investors like you should simplify the process of learning how to get that edge in the market and take your trading to the next level.
This is the safest and most effective trading method to follow. Using the strategies discussed above, you’ll discover a simple, effective education and trading process which will enable you to take o