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Monday, December 7, 2009

ETF Trading Strategies: Introduction For Beginners

By Patrick Deaton

One thing that a person who is just starting to get involved with ETF trading strategies is there are a lot of strategies for people that are designed for the sort of trading that will take place. One of the important things that a beginner must do before committing to a strategy is take some time to figure out which type of strategy will work best.

Establishing safety nets, such as buy and sell limits, will give the beginner the flexibility needed to try strategies and methods as they find the one that is best for their needs. Creating a plan that includes a time-frame for testing methods and strategies will allow a person to use a strategy without making a long term commitment to that strategy.

The ETF strategy that one employs will, in large part, be determined by the type of trading that will take place. A person who is adding ETF as a long-term part of an established portfolio will use a different trading strategy than the individual who is entering trading for short-term gains.

People who trade ETFs for long term investment, may look at, and trade ETFs on a yearly basis when they review their mutual funds and the rest of their portfolio. These individuals do not need the type of ETF strategy that a person who is getting in and getting out on a regular basis needs.

Knowing about ETF trading, the structure of ETF, and the methods for trading can make a significant impact on the returns that one sees from their ETF trades. Taking the time to research strategies before implementing them is critical to creating an effective strategy for an individual. There are many strategies that are advertised on the Internet. However, it is important to see how that strategy has performed from a historical perspective.

Part of researching strategies will include looking at the history of the strategy being proposed. There are many strategies advertised that do not have a history. The strategy may work for a few people, but there is not data regarding consistent effectiveness of that strategy. This can increase risk when one is trading in the more high risk ETF sectors. Adding an unproven strategy to Leveraged or Inverse ETFs can increase the risk of trading to an unacceptable level.

Many financial advisers and long term ETF investors use the Buy and Hold Strategy. This strategy is designed more for low risk trading. The trades are spread across many sectors so the overall portfolio risk is reduced. This strategy does not require constant attention and is a relatively hands-off approach to trading. The strategy provides steady growth from varied financial products. This is also the down side of the strategy. The trader does not know what is happening in the market on a regular basis, does not follow the index, and misses many opportunities to take advantage of changes in the market that can result in significant gains in their portfolio.

For a beginner who wants to take a more active role in trading there is a variation of this strategy that can be effective. The Active Long-Term Trading Strategy is a lot like the Buy and Hold Strategy but the trades worked with more frequent trades or periodic portfolio rearrangements.

When deciding on a strategy it is very helpful to discuss one's goals and objectives with an individual who is knowledgeable in ETF trading strategies and the structure of ETF trading. By effectively pairing the correct strategy with the trading style that one has, there is a greater possibility for success in the trading arena. - 23208

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