A Simple ETF Trading Strategy to Make Money

Many people search the internet over to find the magic stock trading strategy that will enable them to strike it rich and retire. They dream of being the next Nicholas Darvas who traded a few thousand dollars until he had amassed over $2,000,000. That would be ideal and although it is not impossible it is not necessarily likely either.

Often when chasing the big kill or the complicated trading strategy we overlook some very simple trading strategies that consistently make money. They are so simple at times that they are discounted. But if you stick firm to a strategy for entry and exit of your positions you can make sizable gains. Let's discuss one such strategy. Try to reserve judgment of the strategy until you see what is possible.

This simple strategy uses two different moving averages and signals a buy when the quicker moving average crosses above the slower moving average. I then set up parameters that will cause me to exit my position. We will discuss this in a few paragraphs.

So what moving averages should you use? That is entirely up to you but since I am more of a trader, I use two shorter moving averages. Specifically, I use a 5 day exponential moving average and a 15 day exponential moving average. I use an exponential moving average rather than a simple moving average since it gives more weight to recent activity.

There are four things that I look for when choosing an ETF.

I look for at least 150,000 shares traded per day and preferably like to see that number closer to one million. I want to make sure that when I am ready to get out that there will not be a problem unloading my shares.

I choose an ETF that mirrors the overall market or some aspect of the market like the banking sector. I like this since these ETF are less prone to swings driven by only a few stocks.

I also choose ETFs that are volatile, specifically those that move 2 – 3 times more that the underlying index that it is representing. Why do I do this? As I mentioned I am a trader so therefore I look for larger moves which is exactly what I get with volatile ETFs.

Many of the ETFs I look at also have a bear counterpart. This allows me to play both sides of the market and not sit on the sidelines waiting for a signal. Depending on how you set your system up you could literally be invested at all times in one direction or the other.

Let's take a look at how effective this system can be with DPK and DZK.

As you can see from looking at the charts, when one ETF goes up the other goes down. If you only played the upside on these ETFs let's see how things would have gone. We will enter the trade when the 5 ema crosses above the 15 ema and we will exit the trade when either of four things happen. If the 5 ema moves below the 15 ema or there are three consecutive closes above the 5 ema or the stock closes below the 15 ema or there is a large gain in a given day.

I have listed below the trades that would have occurred with this system.

DPK    15.32     17..37      13% Gain

DZK    64.54     72.99       13% Gain

DPK    14.87     19,15       28% Gain

DZK    50.40     45.93        9% Loss

DPK    18.77     17.37        8% Loss

DZK    47.12     49.2          4% Gain

DPK    13.99    13.00         7% Loss

DZK    50.95     62.84        23% Gain

Since January 2010 you would have made 8 trades.  Five would have been winners and three would have been losers.  However, the system allows you to get larger wins that losses.  As a result you could have made good money. 

If you had invested $10,000 you would have ended up with over $16,000.  That is a 60% return on your money.  Sometimes the simplest strategies are the ones that work the best.