Stocks Moving Up but ETFs Show Higher Gains
Thousands of new Exchange Traded Funds ETFs have been created over the past few years, providing another way to trade stocks for short-term profits.
All ETFs are based on a group of stocks often called an index. Often the most popular ETF among traders is the DIA or Dow Jones Industrial Average.
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.
The secret to trading an ETF is to follow its underlying index, as they will always closely match. At the very end of each 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 supply and demand activity, but on the index value as it changes is the first step to successful ETF trading.
ETFs 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.
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 ETFs. If you want an easier way to trade currencies, commodities, emerging markets, foreign country indexes, or a specialty industry such as biotechnology then 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. 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.
Chart example #1 below has been sideways with heavy selling over prior weeks. At this point the candlesticks do not reflect whether it will break out to the upside or downside when the sideways market correction ends. Selling pressure is high and price indicators are likely to reflect this pressure.
Martha Stokes CMT
TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
Copyright ©2017-2019 Decisions Unlimited, Inc. dba TechniTrader. All rights reserved.
TechniTrader is also a registered trademark of Decisions Unlimited, Inc.