I think you will agree, building a winning stock trading system is not easy.
And deciding whether to run your system on 7,000 potential stocks or Exchange Traded Funds is a question only you can answer.
But you can radically simplify your approach.
Over the years, I have been developing my various stock market systems, and I have had somewhat of an epiphany. I enjoy trading stocks, and I have a wealth of Stock Screening technology setups to help me find and target the right stocks at the right time.
I have spent a long time developing them. Some of my systems use exotic indicators such as Keltner Channels, Ichimoku Clouds, Wilders RSI, and even Bollinger Bands. Some setups are a lot more successful than others. But none are absolutely perfect. Most of them generate positive returns; if they didn’t, I would scratch them.
1. Challenges with Automated Trading Systems
One of the challenges with automated trading solutions is the volatility of stocks. When fear and greed creep into the market, especially on an individual stock level, stock price variations can be huge. When Earnings season is upon us, there will be plenty of announcements whereby a company stock price will fluctuate between 5% and 10% within the day.
Systems do not deal with earnings season well because the technical analysis (price trend) can be turned upon its head within minutes of the announcement. I am not complaining; I have had my fair share of Option trades on a volatile stock just before an announcement and banking a 100% return within the day. 100% returns are possible if you option a stock via a Call or Put, and the stock moves 10%, typically magnifying the gain or loss between 8 and 10 times. However, I have taken significant losses on those types of bet also.
Trading individual stocks on a medium to long-term strategy does take a lot of time investment, and you typically have 50% winners and 50% losers. The profit is actually in the average gain versus the average loss per trade. If you can move the win ratio in your favor, then even better.
An Epiphany on Stocks vs. ETF’s
The eureka moment came to me when I applied one of my simple price-based systems to the market indices and realized that if I utilize it here, I would have a lot fewer trades and better long-term growth.
My thoughts are essentially this. The overall market direction is easier to interpret because the indices move slower. They aggregate the overall market consensus and not just the emotions of investors in a particular stock. My system has been consistent enough over the past 25 years for me to trade it live.
I will not share the yearly percentage return of such a system; suffice to say it beats the market; at the end of the day, that is what we all want, especially as 90% of fund managers fail to do so.
I will lay out my arguments for why trading global indices vs. buying individual stocks is something you should consider.
2. Company Information Overload vs. Manageable Economic Data
With thousands of individual stocks trading on most stock exchanges, keeping up with the news flow can be challenging. Even if you have honed your watch list down to a handful of 20 or so stocks of interest, maintaining a good grip of the fundamentals, market climate, and industry developments can be a full-time job.
If you fail to spot something important, you could miss a significant trend-changing development.
Conversely, stock market fundamentals such as interest rates, retail sales, fiscal policy, monetary policy, and inflation are all managed relatively slow to change. This gives you time to evaluate the impact and the market sentiment as a whole.
3. Stock Volatility vs. ETF Stability
We all know that stocks can be extremely volatile. Of course, micro-cap and small-cap stocks are the most volatile over the short term. But large caps and blue chips can also devastate a portfolio’s total yearly return over time.
That is not to say that you cannot lose money investing in an index exchange-traded fund (ETF); however, the short-term losses are much less.
For example, I am sure that stocks you own may lose 3% to 5% in a day on a fairly regular basis; however, if a major index loses 5% in a week, that is a sign of a significant stock market shock.
This is what I call a shock event warning in the book “How to avoid the next stock market crash.”
4. Stock Trading Takes Time vs. ETFs Save Time
Using techniques taught in the Liberated Stock Trader PRO training, it is reasonably straightforward to create a system that can evaluate the overall stock market direction.
Investing in the market during bull markets and selling your ETF’s when you are in a confirmed bear market can save you a lot of time as the major market turning points are years apart, as opposed to months apart for some stocks.
That means fewer trades and more long-term accumulation.
The only problem here is you need to understand what is a significant turning point.
5. The SPY & QQQ ETFs Are World Beating Indices
There is no doubt about it; purchasing individual stocks and seeing them win is a good feeling. But seeing them lose is very painful, especially when they turn around and sell off just hours or days after you purchased them. The slow gains of the stock market indices, I believe, are not as satisfying as the quick gains in stocks, but they can be in the long term more profitable.
Witness the 337%+ rise in the S&P 500 from the market bottom in 2009 to the market high in 2020. That is an annualized 30% return. That is in the league of Warren Buffett. Even the best day traders do not make that kind of profit in a year, and they trade full-time.
Let’s imagine you only re-entered the market in June 2010, missing the start of the new bull market; you would have still made 206%, annualized at 20.6% per year. They are good returns.
The default direction of the stock market, in general, is up; see our stock market statistics page for further information. One can, of course, trade ETFs like they are stocks; we reveal an expert ETF trader’s strategy in this article.
6. Fast Losses vs. Slow Losses
Those dealing in Options can tell you that the gains can be significant, but the losses are also a numbers game. But even trading in stocks can be a volatile experience. Alternatively, significant negative market changes are slow to catch on as the millions of market participants go through the emotions of shock, denial, and acceptance. This is in your favor, and it gives you time to act.
Alternatively, people trade leveraged ETFs successfully for gains. Read our 3X Leveraged ETF Trading Strategy.
7. Technical Analysis Applies Well to ETFs
The technical analysis applies to indices even better than to individual stocks. Rather than having to apply short and long-term stochastics to an intraday chart for a specific share, you can focus on the big picture. Using price-based indicators to assess if the market is in a major up or downtrend. I have provided countless lessons in evaluating the direction of the stock market on this website and in seminars.
- Related Article: Inverse & Short ETFs Based on Assets, Liquidity & Expenses
Listen To Our ETF Podcast
Podcast 006 – The power of Exchange Traded Funds – Good or Bad?
Take a look under the covers of Exchange Traded Funds (ETFs); should you have them in your portfolio of assets?
- PublishedSun, 18 Feb 2018 23:00:00 GMT
- Duration 00:13:08
If you want to reduce the emotional roller coaster ride that is investing in stocks, you can settle for longer-term “boring” gains and invest in index ETFs.
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