Profitable ETF Trading Strategies - 3 Tips For Developing a Market Classification Scheme

In previous articles I have described why a market classification scheme is a high payoff strategy for improving your trading results. I now want to describe a few things for you to consider as you look to take advantage of your edge in market classification.

Focus on the following issues to make sure that your research efforts can be applied to your style and objectives. Remember that you are not in search of eternal truths for all times and places, for all traders and styles. You are just trying to make a reasonable, risk-adjusted return on your invested time and money to achieve financial freedom, This will take you down different paths than those of the pure academic, and with the intent of adding value to your bottom line.

1. Focus on your time frame for trading, especially if you are looking initially to supplement your income and have not yet made the leap to full time, professional, independent market trader for a living. You will have constraints placed on your time by the competing demands of work and family and there will be some styles that are simply not within your reach. No sense trying to develop a classification scheme for a style that will not fit you.

2. Identify interesting markets and targets for you to specialize in. You want these to offer you the kinds of volatility you can trade yet are within your tolerance for excitement. As a trader you must trade on volatility, the fluctuation of price around the idea of “fair value”. It will be important for you in the early years to focus on markets that you find appealing and interesting and about which you will develop a feel and an expertise that will give you an edge. It is these markets where your classification scheme can be informed by both art and science.

3. Look for a blend of art and science in your classification scheme. Find elements of the market’s behavior that may be expressed as rules, like seasonality volatility cycles, time frames that seem to repeat, typical patterns and express those quantitatively. Find those patterns and themes that seem to emerge in the course of your trading to add an element of qualitative description to your scheme. By blending the best of both worlds you will have a market classification scheme that leverages the 2 primary domains of your cognition: art and science, qualitative and quantitative reasoning.

Your classification scheme will help you to interpret price into useful meaning which can be put into favorable risk-managed action.

Profitable ETF Trading Strategies - Finding an Edge in Market Classification

One of the most common quests for trading excellence early in a trader’s career is the search for an all purpose, robust trading secret which can be used to guide the trader through all markets, in all time frames, in any conditions, regardless of the instrument being traded, the size of the position, and your goals and objectives.

In some ways this is a legacy of the increasingly academic pursuit of truth in the marketplace fueled by the need for institutional money and those charged with a fiduciary responsibility for the money of others to employ only the most rigorously tested and objectively powerful strategies. The combination of sizeable management fees and the seriousness of the legal implications of being a fiduciary certainly are compelling reasons alone, but part of me believes that there is also a commitment to the scientific pursuit of objective truth that is there as well.

Almost every sound piece of academic research establishes that there are no enduring edges that an individual trader can take advantage of, and we are advised to follow efficient market theories in various forms to ensure we get the average market returns. And yet there are traders who consistently make better than average returns.

Many are simply lucky and have confused a “to-be-expected” run of luck with skill, and find themselves running out of luck when they are at their maximum exposure level, and are never to heard from again except as an admonition to avoid timing the markets or aiming for more than average.

It is a paradox of course, since only by having individual actors striving for abnormal returns will the market mathematically achieve the efficiency required by academic theory.

When you peel back the onion a little and examine the traders who seem to have an edge not completely explainable by luck and the law of large numbers, there are many who have focused on their ability to link an assessment of market conditions for their selected targets to an appropriate strategy designed to exploit their particular edge.

Crucial to this strategy is the development of a market classification scheme that is related to the underlying dynamics of the chosen market, and which is in tune with the average length of holding positions so that favorable moments that are actionable can be identified.

Individual traders who have found a sweet spot for their edge can apply this idea to improve their average returns, and identify moments of higher than average expected returns. In other articles I will describe some ways that offer insights into this strategy.

Knowing the Tricks For Sell and Buy in Day Trading

For an investor good at day trading, the market is neither good nor bad. It is ideal, for the one who has the capacity to seize the correct timing to buy and sell. An imaginative day trader knows what happens when the market conditions are awful, like the current period of recession. But the good day trading tricks work well at all times.

A day trader needs to be well-versed in understanding the trends. A trend is a pattern that occurs in the share price over a period of time. Finding trend does not mean that one needs to look out for a share whose price steadily rises. It can mean both the rise and fall in prices. When you have located the trend, you have perhaps discovered a sound investment proposal. For example, the share price drops for three months and then rises for 2-3 days. It slowly falls for a few months to rise again! This is the information an imaginative day trader needs. He is able to judge the best time for investment.

A day trader should not prefer a share with low average trade volume. Those with high volume go with the trends and are a safe bet. One needs to avoid the following traps. Buying highly advertised shares, that are flashed on the message boards, tips from unreliable, spam e-mails; picking up shares at random and trading on them exhibiting the instincts of a gambler; holding on to losing positions with a fond hope that something miracle will happen. With this approach, the chances of small losses turning into larger losses are real.

A day trader ordinarily makes several trades in a day, buys and sells a number of shares. He is the one who tries to make profits by taking advantage of the small increase in share prices. He will not buy shares just because their prices are low.

Estimate well what is your liquidity as you enter the exchange with the idea of day trading. You should not do it with money that you can not afford to lose.

Have a definite strategy to buy and sell a share. You must have clear buy and sell signals.

You stand to gain only when you understand the best time to buy a certain share.

You need a constant remainder that emotion is bad. Every share is part of your trading discipline, and nothing else. Do not put blind faith on any technology and carried away by a story circulating in the market. Trade on the basis of solid facts and the conviction formed by your past experience!

Day trading is the most active and the most difficult form of trading from the point of view of risk. You need the investment tools like quotes and charts, real-time news on your tips. You also need to be the master of all types of strategies, to eke out profit from your trades. For the beginners, caution needs to be exercised at every step. To start with, concentrate on certain group of shares or an industry. The more you specialize, the better are the opportunities for profitable trades. Use trade systems with hot/short lists. This will enable you to find opportunities with speed and easiness for shares you are trading. Make changes and update the hot list and share groups at short intervals. When not sure about the market avoid the trades.

Your capital is precious and needs protection at all times and therefore do not waste it on uncertain positions; the market provides plenty of opportunities. Concentrate on one opportunity at a time. This approach reduces the trading risks and assists in maximizing opportunities by increasing position sizes. Exercise cautious control on the number/frequency of trades.

The distance between the tower of success and the deep pit of failure is not much in day trading. You need to strike the careful balance, by remaining a disciplined trader.