How do you use trend-following with ETFs?

1 What is trend-following?

Trend-following is a form of technical analysis that aims to capture the majority of a market trend, whether it is up, down, or sideways. Trend-followers use various methods to identify the direction and strength of a trend, such as moving averages, trend lines, chart patterns, and momentum indicators. Trend-followers also use rules to enter and exit trades based on signals generated by their methods, such as breakouts, crossovers, or reversals. Trend-following is a reactive, not predictive, strategy that adapts to changing market conditions.

2 Why use trend-following with ETFs?

ETFs are funds that track the performance of an index, a sector, a commodity, or a basket of assets, trading like stocks on an exchange. These funds offer several advantages for trend-followers, such as diversification, liquidity, cost-effectiveness, and transparency. Diversification allows you to access a wide range of markets and assets with a single trade, reducing your exposure to individual risks and increasing your opportunities to capture trends. Furthermore, ETFs are generally liquid and easy to trade, which is important for trend-followers who need to enter and exit trades quickly and efficiently. Additionally, ETFs have lower fees and commissions than individual stocks or mutual funds, which can improve your returns over time. Moreover, ETFs disclose their holdings and performance regularly, which can help you monitor and analyze your trend-following strategy.

3 How to choose ETFs for trend-following?

When choosing ETFs for trend-following, there are some criteria to consider. Volume is an important factor, as ETFs with high trading volume and narrow bid-ask spreads indicate liquidity and ease of execution. Additionally, you should look for ETFs with low expense ratios and management fees, as these can eat into your profits over time. It’s also important to consider tracking accuracy; look for ETFs that track their underlying index or asset closely, without significant deviations or discrepancies. Finally, look for ETFs with consistent and strong performance over different time frames, which indicate trending behavior and potential.

4 How to apply trend-following methods to ETFs?

There are many ways to apply trend-following methods to ETFs, depending on your preferences, goals, and risk tolerance. For instance, you can use moving averages to identify the direction and strength of a trend, as well as to generate entry and exit signals. This could include buying an ETF when it crosses above its 50-day moving average, and selling it when it crosses below it. Moreover, trend lines can be used to identify support and resistance levels, as well as generate entry and exit signals. Additionally, chart patterns can be used to identify trend continuation or reversal, as well as generate entry and exit signals. All of these methods can help you make informed decisions about your ETF investments.

5 What are the benefits and challenges of trend-following with ETFs?

Trend-following with ETFs can offer many benefits, such as simplicity, flexibility, and profitability. This strategy does not require complex analysis or forecasting; you just need to follow the rules and signals of your method and stick to your plan. Additionally, you can choose from a variety of ETFs and methods to suit your style and objectives. This strategy can capture large and sustained market moves and compound your returns over time. However, trend-following with ETFs also has some challenges, such as risk, discipline, and performance. You need to manage your risk and use stop-losses and position sizing to protect your capital. Additionally, this strategy requires patience, discipline, and emotional control; you need to overcome your biases and emotions and follow your rules and signals consistently. Lastly, this strategy can be cyclical; you need to be prepared for periods of underperformance and volatility and stick to your strategy over the long term.

6 What are some best practices and tools for trend-following with ETFs?

To succeed in trend-following with ETFs, you need to implement some best practices and use tools that can help you improve your results and performance. For example, backtesting and optimizing your strategy on historical data is important to see how it would have performed in different market conditions and scenarios. TradingView or MetaTrader are tools that can help you do this. Additionally, monitoring and reviewing your trades regularly is important to track your portfolio and performance. TradeStops or StockCharts are helpful for this. Lastly, keeping a trading journal can help you improve your trend-following skills and mindset; Edgewonk or Tradervue are useful for this.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?