Top 4 Reasons Why Traders Should Consider ETF’s

1)An Exchange Traded Fund (ETF) is a relatively new instrument that trades like a stock and has changed the way capital is being deployed on Wall Street.  ETF’s, like stocks, come in all different shapes and sizes, but they all represent a way to profit from an “idea”.

Here Are 4 Top Reasons Why You Should Consider ETF’s in Your Trading:

1) Express Investing Ideas Via ETFs

Top 4 Reasons Why Traders Should Consider ETF'sWhether you are a long-term investor or an active trader, every buy or sell decision you make in the market begins with an idea. The market thrives on ideas and the number one reason why most people under-perform the market is because they do not have access to the right ideas. Instead, they shoot from the hip and do not have a plan.  They let their emotions take over every time the stock moves a few points in, or out, of their favor.  I  know making money on Wall Street is not easy, unless you have the right ideas, so this is why you can express investing ideas via Exchange Traded Funds (a.k.a. ETF’s).

For example, let’s say you want to buy gold in your IRA (or normal trading account) but can’t buy physical bullion and don’t want to buy individual gold stocks. The easiest way to express that view would be to buy the GLD, which is a highly liquid ETF that tracks gold prices. The GLD reflects the price of gold and can be bought and sold instantly. Another investor might want to invest in biotech stocks. So they might buy the IBB, a highly liquid, and very popular, Biotech ETF. So on and so forth.

 

2) Find The “Right” ETF That Best Fits Your Investment Idea

Top 4 Reasons Why Traders Should Consider ETF'sThe latest studies show that there are over 1,500 ETFs on the market, and over 150 new ETF’s launching each year. This is why it is very important to pick the right ETF.  The way that I use ETF’s is to start by asking myself what is my underlying investment idea? Do I want to own tech stocks? If so, then I will look at all the available tech ETF’s and then narrow my search down to the top 3 most liquid tech ETF’s. Then, I’m able to select the one that best expresses my underlying view.  If they are all the same, I will usually choose the one that has the highest average volume (trades the most shares each day).  This way I know I can comfortably get “in” or “out” anytime the market is open without a hassle.

3) ETF’s Are Not Expensive

ETF’s are not expensive.  According to ETF.com, the average U.S. equity mutual fund charges 1.42% in annual expenses and the average U.S. equity ETF only charges 0.53%. If you look closer, the vast majority of ETF money is being invested with an average fee of only 0.40%.  That is a huge difference.

4) Create Your Own Mutual Fund

Another benefit I find when investing in ETF’s is that I can use them to easily create my own custom mutual fund.  This means I can buy (or sell) a basket of highly liquid ETF’s, and/or individual stocks.  This allows me to very easily create a mutual fund but at a fraction of the cost.

 

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10 Ways To Control Your Emotions On Wall Street

10 Ways To Control Your Emotions On Wall StreetIt’s important to learn to overcome your emotions so that you can buy stocks that are starting to go up and sell stocks when they start to go down.  You have to know the difference between a strong stock that is going higher and one that is near its top. Stocks that are falling can be sold before they fall further, but at a certain point, they get so low that they are worth considering.

Here are 10 things you can do to overcome your emotions and become a better investor:

1. Use Strategies that Work

Your approach to the market won’t have a hope if your analysis methods are not effective. There are many ways to analyze stocks.  Take one that you like and test it until you have confidence that it works.

2. Write a Trading Plan

10 Ways To Control Your Emotions On Wall StreetSuccess has a better chance of happening when you write down a plan to get there. Have your plan include your rules for entry and exit, risk tolerances and a process for review.  Adapt your plan over time as you continue to find better ways to achieve success.

3. Manage Risk

Understand the risk in every trade you make, and don’t take risks that you cannot tolerate. If your exposure to loss is more than you are comfortable with, you will inevitably break your discipline.

4. Limit Losses

You should always know where the exit door is in case something goes wrong. When you buy a stock, decide the point where the market will have proven your decision to enter wrong.  If the stock falls to that price, get out!  Don’t let small losses grow into big losses.

5. Blame Yourself

10 Ways To Control Your Emotions On Wall StreetThere may be a good argument for why a loss you have suffered is someone else’s fault: The newsletter writer could have been wrong, the media could have been wrong, the government could have gone back on a promise, the company could be corrupt, etc.  Blaming others will never get your money back.  You will not change the actions of others, you can only change your own. Therefore, blame yourself for everything that happens with your money and take steps to make it better.

6. Stop Falling in Love

The more you know about a company, the more likely you are to ignore the market’s message. Companies want you to own their stock.  The more investors that they get to own their stock, the higher the price goes. As a result, there is a bias to the information that you are exposed to.  If you listen too much you may miss activity in the market that is telling you that something is wrong.

7. Practice Patience

Up trends start slowly so you have to be patient when stocks are trying to start a long-term trend. The profit is in the patience.  Hold onto strong stocks as long as they are showing strength. When looking at a company, avoid a short-term outlook that can mislead you about the long-term trend.

8. See the Other Side of the Story

Everything you know about a stock may tell you to buy it and you may do so with complete commitment. However, always ask yourself, “Why is someone willing to sell to me at this price?” If you understand their motivations for selling versus your motivations for buying, you can better determine who is right. Without an understanding of the other side of the trade,  you cannot determine whether the other side is wrong.

9. Avoid the Herd

10 Ways To Control Your Emotions On Wall StreetThe crowd usually loses. When buying, look around at your fellow buyers. Are they well informed, smart investors or are they generally uninformed people watching 60 Minutes? Always try to be one step ahead of the herd.

10. Analyze Your Results

The market is always evolving.  Making constant evolution in your approach to the market is important. On a regular basis be sure to analyze your trades and look for patterns of self destruction. Make changes when necessary.

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Volume Doesn’t Matter & Here’s Why

 

What Is Volume?

When you think about it – that really is a great question. First, lets begin by defining volume. Volume simply is the total number of shares traded in one period (minute, hour, day, week,  month, etc) Remember there are two sides to every trade. Every tick is comprised of a buyer exchanges shares with a seller. So there must be a minimum of two shares for every trade. 
 
 

Why Is Volume Important?

Institutional investors (a.k.a very large investors who dominate the market) buy and sell millions of shares every day. These investors are important because when a large group of institutions begin buying the same stock- the stock almost always goes up. The same is true when a large group of institutions dump a stock (it almost always goes down). Technical analysis 101 tells us that all things equal- it is healthy to see volume expand with the broader trend and contract on retracements. Or, put another way, in up markets it is healthy to see volume expand when the market rallies and contract when it declines. The opposite is true in down markets. 
 

Volume Is Often Misunderstood:

The problem with most conventional wisdom is that most people believe it and it does not always work (most people fail to beat the S&P 500 each year). In fact, my research shows, there is no viable correlation between volume and strong moves in the market or leading stocks. Don’t believe me? Take a look at the chart below. 
 

Let The Facts Speak For Themselves:

The stock market has soared over the past 5.5 years and volume has steadily declined. How is that possible?. Take a look at the annual chart of the S&P 500 over the past 5.5 years. We are in one of the strongest bull markets in history and volume has steadily contracted. The same is true for countless leading stocks.
 

So What Determines Price? 

At the end of the day, volume does not determine price. The number of buyers vs the number of sellers determines price. For example, if there are very little sellers, a market (or a stock) can easily shoot up irrespective of overall volume. The converse is also true in a down market. So the next time someone tells you that volume matters- they clearly have not done their homework or simply do not know what they are talking about. I’m sure this will stir the pot and I welcome someone to prove me wrong.
 
 

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How to Be a Part-Time Trader With a Full-Time Job

Over the years your life changes and therefore your trading strategies will need to adapt in order to take advantage of the market.  When a major life events happen, such as getting married or having a baby,  you need to know what you can expect from yourself and your trading and how much time can be dedicated.  Strategies and tools will help part-time traders succeed at taking advantage of the market.

Here Are Some Strategies On How to Be a Part-time Trader With a Full-Time Job

Take Advantage When the Market is Sleeping:

How to Be a Part-Time Trader with a Full-Time JobSelf-awareness is key to understanding why you trade.  You need to understand where you are from a trading education standpoint and where you are at an emotional and environmental standpoint.  When I got married and had my child, it turned my trading strategy upside down.  I didn’t have the same time to dedicate to my trading that I had prior to that life change.  Now that I was balancing my full-time job and family life,  I ended up adopting Nikolas Darvas’s strategy of trading part-time.  He was a legendary trader who traded part-time and was a full-time dancer who traveled the world.  He would study the markets on nights and weekends.  I adopted a similar approach and I take advantage of the market when the market is sleeping.   

Place Orders That Trigger Automatically During the Trading Day:  

I set my trading plan so that I don’t need to look at the markets at all during the trading day.  I place working orders with brokers and have buy stops in place.  So, if a stock crosses “x” price, then I’ll be in at that price.  Same thing with my exits.  If a stock falls below “x” price, then I’m out.  I don’t have to worry what is going on in the market during the day because I’ve already figured out my plan.  The plan is setup to execute automatically.  I just need to make updates to the plan at night and on the weekend.   

Utilize Tools to Automate Process:

In order to determine the stops, I need to do my research and figure out at what price I am comfortable getting into and out of the trade.  I take advantage of the Advanced Stock Reports that Adam Sarhan writes for both trade ideas and trade management.  Having a service like this really cuts down on the amount of time needed to successfully navigate the market.  

 

Check out my full interview with Nasdaq Live’s Jill Malandrino here:

 

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