TRADING SYSTEMS
Timing And Trading
Profit With ETFs
by Gerald Gardner and Trent Gardner
Here's a timing method you can use to trade exchange traded funds.Exchange traded funds (ETFs) are ideal candidates with which to explore the timing of investments. More than 400 ETFs are tradable and represent various sectors of the US economy, specific country funds, and commodities. An advantage to ETFs is that they offer daily continuous pricing that mirrors the share price performance of the underlying security with flexibility in the timing of purchases or sales.
For this study we picked three funds to invest in from a universe of 100. A backtest of our model suggests that you can achieve a return of almost 18% and a low drawdown of 8%. Before examining the timing model, we will review some of the principles that drive the development of the timing paradigm.
Timing is a technique of tracking market movements to find patterns of prices so you can capitalize on market behavior and anomalies. The primary aim of the market timer is to focus on the volatility of price movements and identify trends in price series. Timing enhances returns and minimizes drawdown by making buy or sell decisions using these distortions of the market.
ETF SELECTION
The biggest advantage to trading ETFs is that they offer diversification with a large number of individual holdings in each fund. From a timing perspective, this presents an opportunity. Research, both academic and experiential, suggests that funds with a large number of holdings establish trends and exhibit reversions to the mean. By contrast, individual stocks do not exhibit such behavior. This timing model seeks to identify funds that have gone down too much and are expected to return to a more normal valuation.
...Continued in the June issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the June 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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