How to Develop Your ETF Trading Strategy

You have many options for developing trading strategies with ETFs. These Exchange Traded Funds have become very popular because they resemble mutual funds but offer the flexibility of trading like stocks.

Typical screening methods are offered by most brokerage websites that allow you to screen based on performance over different time periods or, for example, by industry or economic sector. Trading based on these methods is the most elementary.

Good ETF investment strategies require a bit more work and decision making. Just a few years ago there were less than a few hundred ETFs, now the number is over a thousand and growing daily. When there were less than 200 it was relatively easy to choose where to invest, now like stocks and mutual funds the choosing can appear to be more complex. But it doesn't need to be complex or intimidating.

The principles of developing an ETF trading strategy rely on the principle of divide and conquer along with separating the weak from the strong. You can do this by reading, lots of reading, studying charts, lots of charts, or by using a software program that will easily allow you to sort the ETFs into manageable groups from which you can find the strong, profitable winners.

Trying to find a few strong winning candidates from a thousand or so symbols has a variety of pitfalls that ultimately leads either to defeat or to mediocre results. These pitfalls occur because similar symbols, let's say ETFs based on China will clump together or all the bond ETFs will be clumped and these clumps will hide and camouflage other potential winners.

My first suggestion is to divide and conquer; separate the ETFs into categories, and yes, some ETFs may fall into two or three categories but that is okay as long as you don't overdo it.

Categories that I use include:

• Domestic
• Foreign
• Europe
• South America
• Asia
• Emerging
• Sectors
• Assets
• Energy
• Health
• Precious Metals
• And the list can go on

By dividing the ETF symbols into categories you have a better chance of finding potential winners. Each group may not be growing or producing winners at the same time but that leaves you the opportunity to easily shift to a group that is growing and to a ticker symbol that can make you money. It is easier to spot trends and winners from within small groups than from a large mass, just like it's easier to appreciate the blooms on a cherry tree in the park than to pick out the most attractive tree in the forest a mile away.

Separating the weak from the strong, in other words finding those tickers that will make you money, can be accomplished a variety of ways.

A few keys to finding winners:

• Study charts
• Screen for performance
• Relative Strength Analysis

I am partial to first letting relative strength analysis, Alpha in particular; separate the leaders from the followers. After I have found the leaders within my groups I set up sell signals to both safeguard my money against dramatic losses and to lock in my future profits. Yes, you can do this using programs like Excel or if you value your time, investment software. Once my software, using Alpha, has found the best buy candidates I do review a few charts to verify the recommendations before placing my buy orders.