Trading ETFs: Gaining an edge with technical analysis

November 30, 2009 06:00 PM

Trading ETFs: Gaining an Edge with Technical Analysis
By Deron Wagner
Bloomberg Press
$55.00, 225 pages

ETFs are relatively new to the world of trading. First introduced in 1993, they have seen a phenomenal rise in popularity. As of June 1, 2009, some 740 ETFs trade on the open market with assets above $600 billion. ETFs offer a huge trading market, and they are here to stay. Like most things new, though, much remains unknown about ETFs. Deron Wagner’s book lucidly explains ETFs and how they trade and also details his back-tested, technical approach to trading them.

Wagner, manager of the Morpheus Capital hedge fund, opens his book with a succinct history of ETFs and then moves quickly into a detailed explanation of what they are and how they trade. In this, the most interesting aspect of the book, Wagner gives the reader a clear understanding of ETFs. He also specifically explains how to trade ETFs using technical analysis and defines his “top down” strategy for trading ETFs. Then, he focuses on timing your ETF trade and strategic considerations for developing and fine tuning your strategy.

Wagner bases his ETF trading approach on a simple premise, that profitable trading systems that rely on technical analysis are basic and efficient. This is his claim, yet his explanations of the technical strategies are complex and steeped in technical jargon. If you understand technical analysis but are not deeply into it, you might find this reading laborious. If technical analysis is a second language for you, then the writing will speak to you and, perhaps, teach you something that will help your trading become more profitable.

Wagner does do a good job of laying out his top-down strategy, which consists of five steps. Step 1: Determine the direction of the broad market trend. Step 2: Find the individual indexes with the relative strength or weakness compared to the major indexes. Step 3: Compare all the ETF families within the specific index to find the individual ETF with the most strength or weakness relative to the corresponding index. Step 4: Select the resulting long or short ETF position now most likely to outperform the market. Step 5: Find the proper timing for a new position entry in the ETF most likely to outperform the market.

Wagner’s complicated, technical explanations for trading ETFs belie his statement that his technical approach to trading ETFs is both logical and relatively simple. The devout technical analyst would assuredly agree and find his book both helpful and illuminating. The trader interested in discovering a simple, technical approach to trading ETFs might not.

Wagner writes to those with a high level of technical skill, however those who are less inclined to deeply explore trading ETFs through technical analysis can still glean some solid nuggets from his writing, specifically about understanding ETFs and how they trade, how to set up a trading strategy in general, and understanding the reality of winning and losing in trading.

Brandon Jones is an entrepreneur, a writer, and an educator. Although not a trader by profession, he trades on a regular basis to maintain and improve his portfolio return.

About the Author