December 15th, 2020
Given that there will be a shift in direction for this blog come the end of the year, I thought I would make sure you had some idea about the ETFs we have been using in this theoretical exercise.
This is not a geek out, I am just giving you some basics.
ETFs are “Exchange Traded Funds”. The big advantage they have over mutual funds is their low management fees. That is because of the low management. Typically they are position based, or represent things such as gold or oil or some segment of the market.
They trade like stocks. This means that for the average person you can have a “stock” that has the diversification of, say, the S&P 500.
You can also have exposure to the main commodities without the need for a futures account. This is handy because most people are trying to improve their retirement accounts. That type of account typically has limitations depending which jurisdiction is in charge of your money.
There can also be a philosophical problem for many regarding “shorting” anything. I have never understood this, but it is a problem for lots of you.
ETFs can solve that for you. One will rise as whatever rises and its inverse will rise as whatever declines.
No, that was not a Jedi mind trick. Let’s take a look using the magic of charts.
The S&P 500 is an index of arguably the 500 largest companies on the planet. Actually, let’s just take a moment to clarify the difference between the indices and the stock market.
We hear on the newts that the stock market was in free-fall and then you they tell you that the Dow Jones fell by whatever. You need to understand that the Dow is only 30 stocks. Maybe they are the largest companies, but it is NOT the stock market.
Many of my clients were surprised to find out this oft-quoted index was only 30 stocks.
There are agencies out there who assemble these indices: stocks, bonds, currencies and commodities. There are many more, but I think you get the picture.
The S&P 500 is a great representative of the stock market. Many like the diversity of the Russell 2000 or the Wiltshire 5000. I like the S&P because it has stringent requirements to be included. It says something about a company that is listed on an index such as the S&P 500.
It is enough market excitement for most traders/investors, esp. those working on their own accounts without resorting to the risk of individual stocks.
The financial industry is built in such a way that you won’t find many ETFs in the accounts held and being managed for you by professionals or banks. This is because there is no room in the fee structure of ETFs to pay the advisor.
To be fair, they need to make a living. Their advice is worth something. It has been proven – whether you like it or not – that people do far worse on their own than with someone helping them, even taking the fees into account.
I am not saying that if you are motivated that you can’t do better – you absolutely can. But if you think you can go all millennial and just hit a bunch of buttons, you will have your head handed to you at some point or other.
There is some work involved. Not a lot, but some. I seem to have wandered from our topic de jour.
Back to it…
The SSO is an ETF I use in this trading exercise to represent the S&P 500 rising.
If you take the time and make the effort to scroll back up to the chart of the S&P 500 – I told you there would be some work – you will see that it almost mimics the S&P exactly.
The SDS, on the other hand, does the exact opposite.
This means if the S&P 500 is falling, the SDS will give us a buy signal so that we can benefit from the decline without having to short anything. How good is that?!
This year long exercise has involved 5 market instruments only. The property these particular ETFS have (4 of them, actually) is that they are double up. This means that if the S&P rises by 5 %, the SSO rises by 10%. This also means that if you owned the SDS as the S&P rose your position would decline by 10%.
This is why we control position size and use stops religiously. It is also why we did so well with the decline of oil. That one trade was a major part of the 42% made to date on this portfolio.
It is why I keep banging on about the BIG MOVE and that we just need to probe (not in an X-files kinda way) with controlled trades until the big move presents itself as it surely will, and then beat it like a rented mule.
In the New Year we shall expand our methods and fishing pond as we continue on with this exercise.
I will show you how to scan for trades, use indicators to trigger trades and calculate targets.
You can get a head start by taking a look at my little webinar/class. Click and sign up, a link will be sent to you and you can watch it any old time.
Any questions above the foregoing or anything at all from your trading/investing world, drop me a line: firstname.lastname@example.org.