Are ETFs for trend trading? Yes, even more than stocks, I would say. The ordered list of vehicles for trend trading looks like this:
At times commodities make it to the first spot. Of course, even currencies may do that. So, why this attempt for a list?
Growth stocks have a motor built in. This driver virtually guarantees an inclination for going ahead with a trend, statistically of course. But instead of just investing, it is advisable to trade growth stocks. That’s even better than trading a stock index ETF, because of the inertia real growth products often have. Their uptrend simply goes on until they have conquered the whole world.
ETFs are better than stocks, because they are funds. That means, they are smoothing out ripples caused by random that plague the stock trend trader. On the other hand, stocks may have a stronger trend.
Let’s compare the QQQ (upper chart) with the Apple monster.
The above chart shows why trading trends with ETFs makes sense. Statistically they produce smoother trends than individual stocks. Note that Apple behaves similar to the whole market. Almost every other stock here would have made the differences much more clear. I chose AAPL because these two charts are very similar and it is still possible to spot the basic phenomenon.
The pure stock AAPL has:
- a stronger trend with a bigger absolute move
- greater deviations in daily volume
- stronger relative swings compared to the trend
- more pullbacks.
The most interesting difference here is that the fund shows an amazingly smooth uptrend. If the comparison took place to another stock during the same period of time, this difference would have been even stronger.
Caveat! During non-trending times, roles may change and the index may behave more erratic.
So, what is the conclusion here?
Trend trading needs smooth trends. The smoother the better, simply because you can keep the inevitable stop losses smaller.
One idea is to use ETFs as the investment vehicle of choice for swing trend trading. As an investor you select or preselect ETFs that may have a run in the near future. It is better to bet on long trades than short ones. The money management problem is smaller with ETFs for shorting, but generally downtrends tend to pull back much stronger.
Either you swing trade the ETF or you trade it just from the long side.
Yes, but how?
Simple answer, just use a nice piece of trading software. I have already recommended this thing, and I will not stop doing so. With modern AI techniques it models a trader’s brain, literally, with regard to pattern matching, but with the ability to detect regularities that are invisible to a human’s trading mind.
So. here it is, the recommendation, the infamous swing trend scalper from Russia.
Give it a swingy ETF (daily bar chart) to eat and it will reward you by converting it to pure gold.