Posted on 29 July 2012.
ETF trading and investing strategies for trading and investing in Exchange Traded Funds (ETFs) vary considerably depending upon trading and investment goals and risk tolerance. ETF trading and investing strategies can be utilized to enhance the probability of making money trading and investing in ETFs and to limit risk to appropriate levels.
ETFs have opened a number of trading options and strategies for targeted trading that previously did not exist. If a trader believes a country, stock sector, commodity, currency, or market volatility is undervalued or overvalued and presents a near term trading opportunity, ETFs can be utilized to either go long or short in the area the trader would like to target. In many cases, long and short leveraged ETFs that are designed to move at 200% or 300% are available, and can be utilized by traders trying to maximize their ETF trading profits from an anticipated move.
The fact that ETFs trade in the same manner as stocks allows stock trading strategies to be applied to ETF trading. These include but are not limited to: limit orders to buy or sell ETFs at specific prices, stop limit orders to buy or sell ETFs once specified price limits have been reached, and short sale orders to short ETFs that a trader anticipates will soon fall in price.
The ability to trade leveraged ETFs and employ stock trading strategies when trading ETFs allows traders to maximize their profit potential when trading ETFs, while also minimizing risk by employing trading capital protection strategies when trading ETFs.
ETF trading and investing strategies are in some cases similar and in some cases considerably different. The reason for the differences are twofold: some ETFs perform quite differently over a short time-span (trading) than over a long time-span (investing) and investing goals are often different than trading goals.
The trading strategies associated with ETF investing focus upon investing in ETFs for the long haul to participate in the anticipated long term appreciation in the price of ETFs and collect dividend payments, if applicable. The primary ETF investing strategy is to do the proper research into an ETF one is considering investing in, including reading the ETF’s prospectus, to ensure that the ETF is designed to appreciate in price over the long term, as long as the underlying assets appreciate in price. This is not always the case with ETFs. Leveraged ETFs and ETFs that invest in futures contracts are not suitable for ETF investing because they tend to track their underlying assets poorly over long periods of time, which could lead to significant investment underperformance or losses, even if the underlying assets perform well.
ETF trading and investing strategies have one thing in common, they are designed to make money by buying and at some point selling ETFs. The specific ETF trading and investing strategies employed depend upon the investment time horizon and risk mitigation considerations.
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