By James Woolley
ETFs, short for exchange traded funds, are widely popular with both fund managers and individual traders. This is largely due to the fact that they can be bought and sold at any time, just like traditional stocks. However if you want to make consistent profits trading these instruments, then you have to get your timing right.
They say that timing is everything when investing in the stock market, and the same applies to exchange traded funds. These instruments tend to track a certain index or market. So this could include major indices such as the FTSE 100 and Dow Jones, major currency pairs such as the GBP/USD and EUR/USD pairs or commodities such as corn, crude oil, copper, gold, natural gas and wheat. The truth is that you can find an ETF for pretty much anything nowadays.
Anyway the point is that whatever you are interested in investing in, you have to buy at the most opportune moment. Therefore one option you have is to trade breakouts because a lot of the most popular markets are watched avidly by breakout traders, so any resulting price move can become self-fulfilling to a certain degree.
So for example if the price of crude oil happens to trade between $80 and $100 for months on end before finally breaking through the $100 barrier, then it might be worth buying the crude oil ETF. If the price continues heading higher to around the $120 mark, then you should make around 20% profit from your ETF investment.
An alternative approach is to wait for a market to be massively undervalued. For instance if the S&P 500 drops sharply over a period of several months and the RSI and stochastic indicators are now both below 20 and there is a clear MACD divergence pattern forming, then it may be worth drip feeding some money into an S&P 500 ETF for the long term.
To give you a few examples of how much money you can potentially make from exchange traded funds, let’s look back at 2008 and 2009. During this time you could have bought ETFs in the FTSE 100 when the price was around 3500 (now 6000+) and the Dow Jones when the price was around 6500 (now 12300+). Similarly you could have bought a crude oil ETF when the price per barrel was around $34 (now $93).
So the point I want to make is that ETFs provide you with plenty of opportunities to invest in a variety of different instruments whether it’s indices, currencies or commodities, for instance. However you still need to get your timing absolutely right otherwise you will struggle to make any money in the long run.
About the Author
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