June 23, 2008

Making money with market-based ETFs requires proper market timing.  Active traders should pay careful attention to the technical trends of the NASDAQ, for example, if they intend on trading QID or QLD.  Unfortunately for most active traders they realize that pinpointing exact bottoms or exact tops within a technical trend is rather futile.  Often, and almost always, established levels of support or resistance are breached slightly when they are tested, and this causes problems.  Technical analysts know this far too well. 

If support begins to break should we stop out?

Attempting to pick exact tops or bottoms using market-based ETFs can be dangerous.  Risk controls are obviously required.  The first thing that comes to mind when the words risk control are mentioned in conjunction with trading stocks, are stop losses.  The problem with stop losses is that they require constant attention.  First, we all know that market makers can see our stoploss orders and we all know, arguably, they take advantage of that knowledge every day.  In addition, if a slight breaches of support or resistance levels occur and then the market reverses back in the direction we originally expected after a stoploss has triggered, we must,  prudently, reenter that trade in order to participate in the move; they process would be: trigger the trade, stop, and then re-trigger.  Not only do stop losses require quite a bit of work, but they create excessive commission costs as well.  But are there any alternatives to risk controls?

The strategy set forth below is a prudent alternative.

Use a balanced approach in conjunction with Market Timing and Market Based ETFs to control your risk and make money in any market environment without making excessive trades,  incurring excessive commissions, or spending excessive amounts of time watching the strategy.

The risk controls associated with market timing using market-based EPFs in the strategy below incorporates a balanced approach to the market.  Stop losses are not used in this strategy.  Instead, when a support level or a resistance level is breached we balance our original trade with the opposite ETF to balance our risk.  In effect the original trade and the one that follows wash each other out.  Because we are using market-based ETF_s which perform in the exact opposite way, and  which are triggered near the exact same market level, making money from these two opposite trades is futile.  IE: Buying QID and QLD near the same Market level = a wash.

Instead, this balanced approach requires you to overweight positions in the market based ETF which correlates with the next leg of direction in the market.  If the market moves higher after testing support for example the long market based ETF should be chosen (QLD) to overweight longs as the Market moves up towards the next level of resistance.  If instead the market moves down after testing support the short weighted market based ETF should be chosen (QID) to overweight the original balanced position as the Market moves down towards the next level of support.

This balanced _ overweight strategy alleviates the need for stop losses and re-entries but it still allows you to control your risk and make money in any Market environment.  The process, if slight breaches of support or resistance levels occur, is to balance the position and wait for further indications of direction.  It_s not rocket science, and it is very effective.

You could even do this in an IRA.

This strategy requires you to identify initial and secondary levels of support and resistance.  If you are able to accurately identify these important inflection parameters every day then this balanced trading strategy should work wonderfully to improve your returns, reduce your commission costs, and alleviate the time constraints associated with trading at the same time 

The example below is a real-life strategy from June 23, 2008.  The support and resistance parameters offered in the chart below were provided by Stock Traders Daily in conjunction with their automated correlated market timing and stock selection tool.  This tool alerts you when tests of support or resistance occur and those alerts tell you when to make your trade.  In addition, obviously, the alerts also tell you if you should be a buyer or a short seller.

As of 2:30 p.m. Eastern time on June 23 this strategy had already returned 2.14% to the end user.  Review the details of this strategy by comparing the time alerts in the table to real-time market data.  Afterwards you can find more information by visiting www.stocktradersdaily.com.

Automated Alerts Viewer for 6.23.08

http://www.stocktradersdaily.com