From the March 01, 2010 issue of Futures Magazine • Subscribe!

ETF trading methods: A guide

ETFs allow you to trade securities on a global level, and these markets provide a good example of this trading strategy.

“One observation I have been watching lately is the relationship between oil and gold and the country ETFs of Australia (EWA), Brazil (EWZ) and Russia (RSX),” explains Rick Pendergraft, editor of the Stark Report. “These three particular ETFs seem to move independently (to some degree) from other indexes, because their economies are tied so closely to raw materials.”

A look at iShares MSCI Brazil Index (EWZ), which seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the Brazilian market, as measured by the MSCI Brazil index, shows some interesting ETF setups (see “Long on Brazil”).

On Sept. 3, 2009, EWZ signals an entry at the close at $58.21 as the Williams %R comes back up through the -80 level, while setting your stop under the previous day’s intraday low. Seven days later, the MACD confirms the entry and the trade is managed for the next seven weeks as it makes its way higher. On Oct. 27, EWZ signals an exit at $71.48 as the Williams %R dips below the -80 level, showing a shift in momentum to the downside. The trade is exited with a 13.27 point gain which comes to almost a 23% gain in seven weeks.

Market Vectors Russia ETF (RSX), which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Russia Index, has offered some compelling ETF Long Trend setups (see “Russian opportunity”).

An entry was triggered by the Williams %R indicator on Aug. 19, 2009, at the close of the day at $22.40. On entry, the trader would immediately set a stop-loss under the day’s intraday low, as it had the lowest pivot point. A few weeks later, the MACD confirmed the entry when its fast EMA clearly broke higher over the slower EMA. RSX moved higher over the next several weeks before a sharp price break revealed momentum was shifting and resulted in the Williams %R going below the -80 level. The trade was exited on Oct. 28 at $27.59 for a 5.19-point gain and a return of 23% in just under three months.

Leveraged ETFs also work well with this strategy. These vehicles, generally termed “ultra” or “double” ETFs by the companies that issue them, use derivatives to double the returns — and losses — in the underlying market. PowerShares DB Gold Double Long ETN (DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity Index. Optimum Yield Gold Excess Return also offered several solid setups using the ETF Long Trend Method (see “Doubling up”).

DGP had been stuck in a trading range for the last seven months prior to breaking out on Sept. 3, 2009, which provided an ETF long trend setup on Sept. 29. That day, Williams %R triggered an entry as it came back up through the -80 level for an entry price of $22.31 where you would also set your stop-loss at the previous day’s intraday low. DGP inched higher with the MACD giving secondary confirmation on Oct. 6, 2009, but dipped down signaling an exit on Oct. 26 at $24.36. This first trade yielded a 2.05-point gain for a return of 9% in a little less than a month.

DGP quickly offered another setup three days later when Williams %R triggered another entry on Oct. 29, 2009, for an entry price at $24.72 where you would also set your stop loss at the previous day’s intraday low. A week later, on Nov. 5, the MACD confirmed the entry and price headed upward for the next several weeks. On Dec. 7, DGP’s price broke lower, shifting momentum to the downside and signaling an exit as the Williams %R indicator dipped below the -80 level. The trade was exited at $29.50 for a 4.78-point gain and a return of 19% in about five weeks.

This method will not catch every bottom or exit at the highest high of every price top, but it will help you profit from the meaty middle of the trend. With a vast selection of ETFs to choose from you likely will have more actionable trades than your account can exploit.

Spend time mastering the steps and scanning the ETF market for new opportunities. You will begin to capture the strongest part of a given ETF’s trend, while minimizing your risk to both volatility and loss by using ETFs as a core component to your
trading objectives.

Billy Williams is a 20-year veteran trader specializing in momentum trading in both stocks and options. Read his market commentary at

comments powered by Disqus