Long Term Trading ETF's

Sneak peek of my July 2012 S&C article

Personally I believe that based on technical analysis there are different approaches to look for buy and sell signals.

The first method is the method I use and apply in my book “Capturing Profit with Technical Analysis” (MarketPlace Books). The method called "LOCKIT" explained in the book uses all kind of technical analysis techniques to come up with reliable buy and sell signals. This is not the easiest method because you need a broad knowledge of all the basic techniques and the know how to apply them successfully.

A second method could be the application of artificial intelligence feeding the data and technologies out of the first method into neural networks with the idea to capture automatically price, volume or any other pattern displayed by the first method.

A third method is to trail the price movement buying and selling based on the fact that breaking a short or medium term up or downtrend signals a trend reversal. Here you have to find the most profitable balance between fast entering a trade avoiding as much as possible false entries and staying in as long as possible to let profits run. This is the method I apply in different trading expert systems. However, once there is a buy or sell signal you should look for techniques from the first or second method to avoid non-profitable trades as much as possible.

Using the "third method", it should be clear that this can only be profitable if there are regular and large enough price moves. This is a problem when trading Exchange Traded Funds (ETFs) as they are tracking indices, averaging a large number of underlying instruments. Using ETF daily charts, larger moves with limited drawbacks are unusual. That makes it difficult to trade ETFs profitable with a trend following system

I started by testing a number of country ETFs with different expert systems on daily charts. As expected, the result was not that good considering the limited price moves. Only when I started using weekly charts instead of daily charts the profit was more consistent. The weekly charts have those larger moves we need for a profitable trend following system. An extra advantage is that you only need looking for buy or sell signals once a week. Now I only had to find the best performing expert. The best system I found was with my "Heikin Ashi Candles Oscillator" (HACO), published in S&C in December 2008.

The back test gives a total profit of 290% with an average of 9 trades per ETF or less than 1 trade per year per ETF. The total profit of 290% represents over the 10 years of HACO trade signals, a compounded interest rate of 11% per year. That is not bad for a small effort once a week. Figure 4 shows the individual ETF results. Looking at the date range in figure 4, please remember that actual trading starts around July 2002 because of longer term TEMA (Triple Exponential Moving Average) averages used within HACO.

What is the result if you would make use of a margin account? With a 50% leverage the result is a profit of 466% or a compounded interest rate of 16%. A 100% leverage gives a profit of 885% or a compounded interest rate of 24%.

In the example chart of MSCI Canada below; at the top the equity evolution, in the middle the weekly MSCI Canada data chart and below the HACO trade signals indicator. For this ETF there was a 650% profit with five winning trades and one losing trade.

HACO Heikin Ashi Candles Oscillator

As already mentioned, the "Heikin Ashi Candles Oscillator" (HACO), was published in S&C December 2008. I am adapting it here so that you have very clear signals for long term trading ETFs. Please consult the original article if you want more detailed information about the basic ideas behind the HACO formula setup.

The adapted formula requires is a few more variables in the HACO formula and since MetaStock limits the number of unique variables to 20, I had to reorganize the formula to stay within this limit. So, I am using a different name calling this new version HACOLT or "Heikin Ashi Candles Oscillator Long Term". I also introduced in one of the rules the influence of the size of the candle in specific circumstances to hold on to a position or not.

The setup includes a system tester formula and an explorer setup. That way you can test for your own selection of ETF's and you can use the explorer for automatically finding new buy or dell signals.

READ the complete article in the S&C issue of July 2012.

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