While individual stocks are moving up, ETFs are showing much higher gains
ETFs are the hottest trading instrument at this time. Thousands of new ETFs have been created over the past few years, providing another way to trade stocks for short-term profits.
All EFTs are based on a group of stocks often called an index. The current most popular ETF is the DIA or Dow Jones Industrial Average, which has been providing huge gains for short-term traders in the past few weeks.
Trading stocks on their earnings release date, can be problematic due to High Frequency Traders interference and front running tactics that can reverse a stock within a couple of minutes. However using an ETF can be far lower risk, with much higher profit potential.
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The secret to trading an ETF is to follow the underlying index, as the ETF will always closely match its index. Every end of month, the Trusts that hold the basket of underlying stocks for an ETF are adjusted, to maintain the integrity of the index value to the ETF value.
Understanding that an ETF does not move based on the ETF supply and demand activity but on the index value changes, is the first step to successful ETF trading.
Experts forecast that ETFs will increase in popularity for several more years as they provide investors with an easier way to invest in a specific index or emerging market, debt security, or even currencies without the hassle and time to learn each different financial market.
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There are Exchange Traded Derivatives for every financial market. Even Options now have ETFs based on the stock option or index option, so even low capital base traders can profit from the ETF popularity. If you want an easier way to trade currencies, commodities, emerging markets, foreign countries’ indexes, or specialty industry such as biotech, ETFs make the entire process straightforward and easy.
What you need to remember is that the ETF is not running up on the basis of demand for that ETF. So indicators must be adjusted and adapted to this different reality of supply and demand equations and theories.
The ETF is a value, not a price. In addition since the ETF moves up based on its underlying components in the index, using stock price indicators will not provide the analysis needed to identify potential momentum runs prior to a huge gain for the ETF.
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The Chart below of the DIA value (price) has been sideways with heavy selling over prior weeks. At this point the candlesticks do not reflect whether the DIA will break out and up, or out and down when the sideways correction ends. Selling pressure is high and price indicators are likely to reflect the selling pressure.
However the volume indicator and Accumulation versus Distribution large lot indicators. reveal that the larger lots are on the buy side and not the sell side. This indicates an upside energy coming from the underlying index AND from ETF buyers. ETF buyers which are predominantly Buy Side Dark Pools, and Professional Traders are buying the DIA ETF not selling it. This gives you the vital information of where the heaviest concentration of large lot activity is at this moment in time on this ETF chart.
The ETF DIA breaks out to the upside as the Dow 30 industrial average runs up out of its sideways pattern.
Incorporating Volume, Accumulation/Distribution, Flow of Funds, and Volume Oscillators into your ETF indicators will help you determine breakout direction.
Even if you choose to use Bollinger Bands to identify compression patterns of price, Bollinger Bands do not give you the breakout direction, only that the ETF and its underlying index are poised for a breakout in either direction.
Incorporating these excellent indicators that are part of the Stockcharts.com indicators available to you, will enable you to determine the breakout direction with far more accuracy, allowing you to enter a stock or option for an ETF with greater confidence and higher profitability.
Go to the StockCharts.com Users Learning Center and access a webinar for traders. Click HERE
Martha Stokes CMT
TechniTrader technical analysis using Stockcharts charts, courtesy of Stockcharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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