Introduction - High Probability ETF Trading

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From 2005 to the time of this writing in early 2009, one of the fastest growing segments in the financial markets has been the ETF arena. What started slowly with just a small handful of ETFs in the 1990's has now exploded into ETFs available in nearly all sectors and for trading most major countries.

And the ETF product growth continues. For example, a number of fund companies have launched ETFs that allow you to trade both on the long side and on the short side. And you can also trade up to two times leverage and three times leverage in many ETFs.

What was once considered an alternative to mutual funds has in reality become the go-to products for hedge funds and professional traders. You only have to look at the intra-day volatility along with the rapidly increasing volume to know that "investors" are not the main force behind the growth of the ETF industry. The traders are.

There are very few ETF strategy books available today (as of early 2009).

Thp fpw t-hat arp onf- thprp forns; on fhino^ likp pynpnsp rah'os and thp man agement behind the ETFs. Maybe these are important things for investors but this information is of little use in making day-to-day trading decisions for ETFs.

What we hope to do here in this strategy book is to provide you with seven high probability ETF strategies you need to know.

Each strategy comes with exact rules and is backed by years of statistical test results. There will be no opinions or guessing coming from this book. There's an exactness to the strategies and youTl be able to take them and apply them immediately to your trading.

Everyone knows that in real estate the key to success is "location, location, location!" In our opinion in trading, and especially ETF trading, its "quantify, quantify, quantify!"

Before we move to the strategies let's first look at a few important things:

1. What is High Probability Trading? It's trading using strategies which have historically been successful a high percentage of the time. With ETF trading, we like strategies that have been correct on average at least 65% of the time (obviously the higher the percentage correct, the better) with good average gains per trade (which means all trades combined-both winning and losing).

In High Probability ETF Trading most of the strategies you'll learn have been correct in the 70%-80% range for many years, with the TPS strategy (Chapter 8) being correct almost 90% of the time on the broad universe of ETFs we tested.

2. The test results begin on January 1993 or since the ETF has been publicly traded, whichever is furthest back, and runs through December 31,2008 (the last full year through the time of this writing). We tested each strategy on 20 of the more popular (measured by volume) non-leveraged, non-inverse ETFs as of the end of 2008.

3. All the tests are simulated and are not real trades. Also slippage and commissions have not been factored in but dividends and splits have.

4. We intentionally left out leveraged ETFs and inverse ETFs for the following reason:

The trading history of most inverse and leveraged ETFs is too short versus the ETF universe we tested. That means that the testing sample size on them would have been too small (as of the end of 2008) to provide credible test results. Over time though, as the sample size increases, we'll go in and test the strategies on the leveraged and inverse ETFs. Please use extra caution if you decide to apply these strategies on those ETFs.

5. You should be able to start trading the strategies in this book immediately. They're easy to understand and straight forward. If you don't understand a strategy, feel free to call the TradingMarkets office at 213-955-5858 ext. 1 and someone will be able to assist you. TradingMarkets cannot and will not give individual advice but we can discuss the strategies and the execution of the strategies.

6. If you want to receive the daily set-ups from this book, you can subscribe to them on the website or at You can also call 213-955-5858 ext 1 for a free trial.

7. We believe that ETF trading will become even bigger overtime. Why? A few reasons.

First, after the poor performance by so many professional money managers, investment advisors and mutual fund managers in 2008, individuals now know they can do a better job of growing their own money.

Second, ETFs don't have the same corporate risks as individual stocks. Stocks can and do go to zero. ETFs usually don't. Corporations miss earnings, have bad things announced overnight, etc. and many times gap 20%, 30%, 40%, 50% or more lower. ETFs rarely do.

For example, when 9/11 occurred, look at where the SPYs opened when the markets reopened. They dropped about 8%. 9/11 was a horrible event, yet the SPYs lost only 8%. Many individual stocks though opened lower by 25% or more. There's obviously more risk in stocks than there is in ETFs and therefore we expect more traders and investors to continue to gravitate to ETFs. You may already be doing so with your own trading.

8. With this said, this does not mean ETFs do not carry risk. Many do, especially the leveraged funds. Please be sure you fully understand the risks involved in each ETF you trade and understand that markets can and do move in ways that they haven't in the past. There's no guarantee that these strategics will work in the future so caution as well as risk control must be used at all times.

9. Among the 20 most popular non-leveraged and non-inverse ETFs by volume we tested for this book are:


Diamonds Trust, Series 1 (ETF)


iShares MSCI Emerging Markets Indx (ETF)


iShares MSCI EAFE Index Fund (ETF)


iShares MSCI Hong Kong Index Fund (ETF)


iShares MSCI Japan Index (ETF)


iShares MSCI Taiwan Index (ETF)


iShares MSCI Brazil Index (ETF)


iShares FTSE/Xinhua China 25 Index (ETF)


SPDR Gold Trust (ETF)


iShares S&P Latin America 40 Index (ETF)


iShares Russell 2000 Index (ETF)


iShares Dow Jones U.S. Real Estate (ETF)


PowerShares QQQ Trust, Series 1 (ETF)


SPDR S&P 500


SPDR S&P Homebuilders (ETF)


Materials SPDR (ETF)


Energy Select Sector SPDR (ETF)


Financial Select Sector SPDR (ETF)


Industrial SPDR (ETF)

10. There are certain rules we abide by that are directly from test results we've found over the years in both stocks and now ETFs. These are our golden rules of trading and the closer you abide by them, the better chance you have of being successful. Many of these rules have more than a decade's worth of statistical results which can be found in our previous book Short Term Trading Strategies That Work.

These rules are:

1. Only buy ETFs above their 200-day simple moving average.

2. Only short ETFs below their 200-day simple moving average.

3. Buy ETFs on pullbacks, not breakouts.

4. Short ETFs into short-term strength.

5. Use dynamic exits. Meaning use an exit that adjusts with current price. This will become clearer when you learn the strategies.

6. ETF correlations change faster than most people believe they do. For example, in most of 2008 as oil prices rose, the SPYs dropped. Then in October 2008 the opposite occurred. As oil prices rose, the SPYs rose. Correlations constantly change.

7. Sector ETFs tend to move from overbought to oversold better than individual stocks.

8. Country ETFs tend to move from overbought to oversold (and vice versa) better than Sector ETFs.

9. ETF products are being constantly created. The more you kppn ahrpast of thpsp Hpvplnnmpnte thp hpttpr vnnr tradinc

If you need further information on ETFs and the strategies in this book, go to and click on the ETF tab on top, or call toll free 1-888-484-8220 ext.l (outside the U.S. call 1-213-955-5858).

You can also find additional tools and products to help you further apply the strategies in the back of this book.

Let's now move to the first of the seven strategies in High Probability ETF Trading.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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