What Wild Boar Hunting, Triathlons, and Racquetball Can Teach You About Trading
Trading is like anything else worth doing. If you want to be good, you’ve got to develop discipline, patience, and mental toughness. Now, you can learn plenty about trading by watching screens and reading books… but sometimes, the very best lessons come on mile 25 of a marathon… or when a 200-pound boar is charging you at full speed. So we sat down with several of our trading experts to talk about the lessons they’ve learned far way from their charts and spreadsheets. Here are their stories. Brandon Perry on Hunting Wild Boars Here in Texas, we love the taste of wild boars. But wild boars love the taste of crops, grazing fields, wildlife, and private property. Smithsonian magazine said they’re “among the most destructive invasive species in the United States today,” doing $400 million worth of damage in Texas annually. I have a rancher friend who invites me to help take care of his problem with wild boars. We start with weather patterns. If it’s rainy, the boars spread out and won’t be concentrated around a water source. In the winter, food gets scarce and they move away from acorn-rich oak trees to lowland valleys with rich sources of grass and grubs. In the summer, they stay out of the brutal Texas heat during the day. That’s my macro analysis. Next, I have to drill down to analyze my specific target. Boars are probably the most dangerous wild land animal in Texas. They have razor sharp tusks and they’re not afraid to take on humans. One time on a hunt, we came across a 200+ pound boar. We’re talking a big ugly beast right out of a horror movie. We saw it and it saw us. Usually they run away. This boar didn’t. He turned toward us and started sauntering toward us. We had a choice. We could run or shoot. My friend took a shot with his AK-47. Now you may think having an AK-47 made this an unfair fight. But boars are very, very tough, with with inch-thick skin and a cranial bone that can deflect bullets. The first shot only made it turn. The second took it down. In hunting, there are a few very important rules to follow. Only take a sure shot Don’t be afraid to pass on a shot Don’t rush your shot. These rules also apply to trading. For example, I love trading washout lows, but it’s not easy. I have to make sure the technicals are right. And when I have my target picked out, I can’t rush in. I need to wait until the odds are in my favor. If things go wrong, I need enough room to exit the situation to minimize risk… whether I’m looking at a charging stock or a charging boar. When trading lows, you have a brief moment for action, and then the opportunity is gone. But in trading, like hunting, opportunities always come around again. So don’t rush to pick a shot. You’ll get another. Brandon is a contributor to the Virtual Trading Floor®. Click here for a 14-Day FREE Trial. Scott Redler on Triathlons If you want a better brain, build a better body. One of the biggest factors in my trading success has been competing in 100+ triathlons and marathons, including 2 Ironman events. When I started doing triathlons, my trading profits went through the roof for 2 reasons. First, I suddenly had fewer hours in the day. That may seem a little counter intuitive, but hear me out. To balance my trading career and family time with triathlon training, I was forced to become more focused. I started getting up earlier, partying less, and most importantly, I learned the power of a routine. Instead of flying by the seat of my pants, I started every trading day with a comprehensive plan. That’s why I’m so adamant about daily game planning. If you don’t have a plan, you end up wasting all your time and energy trying to figure out what to do! When you start your day with a plan, you can keep your eyes on the prize and not waste your time with distractions. And the second reason endurance training is valuable is that it builds mental toughness. You learn that you’re capable of a lot more than you think. When you start out running, running a mile or two may seem impossible. And then you read about Fauja Singh, a man who ran his first marathon at 89! So find an outlet that pushes you physically. It could be an Ironman. Or it could be a walk around the neighborhood, a martial art, or pushups in the office at lunch. Just do something. Click here to learn about Redler Ultimate Access, Scott’s new trader training program. Mark Harila on Racquetball I’ m a trader and a racquetball player. After a day sitting in the office staring at charts, I love the physicality of racquetball. Getting your heart rate up and losing yourself in the game is a great way to let the tensions of our profession go by the wayside. The comradery I have with other players and random little moments of levity really bring me back down to Earth. There are many parallels between racquetball and trading. There’s often a furious pace of play that requires instant analysis. On the court, you must assess: Where the ball is now Where it is likely to go Where the other players are Where to set yourself up in order to best take advantage of the situation In trading, you must assess: Where the price action is now Where it is likely to go Where support and resistance (other players) are Where to find your entries to take advantage of the price action Novice racquetball players are desperate to hit the ball to score points. So they’ll chase after the ball once it has passed them, rather than running to a spot that will give them an opportunity. They take wild shots, swinging and missing repeatedly, because they don’t plan, and don’t know
Continue Reading -->Weekly Sentiment Update: The Bulls Come Out to Play
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, sentiment was very bearish, and I said “I think SPX makes new all-time highs above 2401 by Monday at 9:45 a.m. ET.” And indeed, in the aftermath of Emmanual Macron’s victory in France, the SPX did indeed squeeze to a new record high at 2401.36 at 9:35 a.m. ET. That was followed by another all-time high on Tuesday at 2403.87 before the market fell back into the range. So let’s take a fresh look at sentiment and figure out whether the bears are still growling. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread – Bullish The VIX is at 10.70 this morning after hitting new 10-year lows earlier in the week. The 3-month spread is at 3.7, which means that traders are moderately bullish. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 63. F&G operates on a 1-100 scale, and a reading of 63 means traders are moderatly bullish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 32.7% of individual investors are bullish, down from 38.1% last week. This is below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.65 yesterday with a 3-day moving average of 0.63. This indicates that traders are neutral. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 97 as of late morning (97 calls bought for every 100 puts). The 10 day moving average is 87.6. So the recent trend shows higher put option demand. However, I’ll consider this number neutral because it’s actually risen a bit in the past couple of weeks. Conclusion Out of 5 sentiment indicators, we have: 2 Bullish (up from 1 last week) 2 Neutral (unchanged from last week 1 Bearish (down from 2 last week Traders looked pretty negative last week ahead of the April jobs numbers and the French election results, but they’ve swung to moderately bullish this week. Looking forward, we’ll probably need a meaningful surge above the new 2403.87 record high to push the market into full-on froth category. But to be fair, for 2 reasons, it could be argued that froth already set in: 1) The VIX hit 9.56 earlier this week the lowest level since February 2007 2) There’s just no volatility because the shallowest of dips keep getting bought But let’s play it by ear. Low-volatility stretches can go on for a long time before anything changes.
Continue Reading -->Volatility Hits a 55-Year Low: Is a Trump Slide Coming?
On Monday, I provided an in-depth analysis of the post-election collapse in volatility, just as the VIX was hitting levels not seen since February 2007. In that piece, I focused on day-to-day volatility of the S&P 500. Now, I’m going to take a look at intraday volatility. I used a very simple but effective formula to make my judgements. I took the day’s range (the high minus the low) and divided it by the prior day’s close Since 1950, the S&P has had an average intraday range of 1.2%. Since 2000, the average intraday range has been 1.4%. In 2016, that number was 1.0%… up until the election. And after the election, it dropped to just 0.6%. So just as day-to-day volatility dropped, intraday volatility has dropped just as much. Now here’s where things get really interesting… We’ve had 125 trading days since the election, with an average intraday range of 0.584% — half the long-term 1.2% average. (as of 1:00 p.m. ET) The last time we’ve had a 125-day stretch with so little intraday movement was March 19, 1962! If you’re falling asleep… you have good reason. And oh yeah — the S&P had a rough time after March 19, 1962. It closed at 70.85 that day, and fell to 52.83 on June 27. The market’s dip in 1962 was deemed “The Kennedy Slide.” Heck, there was even a Flash Crash on May 28, 1962, with the Dow falling 5.7%. Could we see a similar Trump slide? I guess it’s possible, mostly because it’s not uncommon for a bear market to be proceeded by a low volatility stretch. To balance that, I’ll issue my usual caveat: a sample size of 1 means absolutely NOTHING, and I do this kind of research mostly for entertainment purposes. And to be even more clear: I’m not rushing to get short the market in anticipation of a big drop. But for fun, let’s look at some historic parallels. The JFK Library said this about President Kennedy: John Fitzgerald Kennedy captured the Democratic nomination despite his youth, a seeming lack of experience in foreign affairs, and his Catholic faith. And in 2016, Donald Trump completely smashed the Republican establishment despite having zero political experience. Sheer charisma played a big role in each man’s victory. And in both elections, the market rallied after the result. What about geopolitical tensions? Kennedy had the Bay of Pigs Invasion in 1961 followed by the Cuban Missile Crisis in 1962. In 2017, we’ve got Russia, Syria, ISIS, etc. That’s quite a few coincidences to content with…
Continue Reading -->The Rise of Donald Trump and the Collapse of Volatility, by the Numbers
With the VIX hitting 9.69 today — a level not seen since February 2007 — I wanted to get an idea of just how slow the market is moving. To do so, I analyzed daily S&P 500 price data going back to 1950. Since November 9, 2016, the first trading day after President Trump’s victory, the S&P has moved an average of 0.3%* per day. (*percentages expressed in this article represent the daily percentage change expressed on an absolute basis. So if the market moves -1% on Monday and +1% on Tuesday, the average move is 1%) But going back to 1950, the daily average move is 0.7%! And here’s another funny stat. The average daily move in 2016 BEFORE Trump’s victory was 0.6% — pretty close to that long-term 0.7% average. So my 6th grade math proves that volatility collapsed after the election, even though we’ve had no shortage of market-moving news, between the Fed, French elections, Syria, North Korea, Trump/legislation, etc. Now let’s look at 1% daily moves. We’ve had 122 trading days since the election. And the S&P has moved 1% or more exactly 5 times. That’s 1 out of every 24.4 days. In 2016, before the election, the S&P was moving 1% once every 4.7 days. Long term, the S&P had 1% moves every 4.9 days. So we used to have a big move once a week. Now we’re getting them once a month… if we’re lucky. But what’s really interesting is that we also saw an extended period of low volatility prior to the last bull market peak on October 11, 2007 — though it wasn’t as quiet as this one. From January 1, 2007 to October 11, 2007, the market moved an average of 0.5% per day. 2006, a remarkably sedate year, also had an average daily move of 0.5%. So are we seeing parallels between 2007 and 2017? Maybe. Just remember this: if you’re drawing parallels between 2007 and 2017, you’re talking about a sample size of exactly 1. That’s not exactly scientific. So who’s to blame for the lack of volatility? ETF’s? Runaway algos and high frequency trading programs? Trump himself? Newly confident CEO’s that love slamming the buyback button? The Alphabet Soup Gang? (the Fed, ECB, BoJ, BoE, etc.) All of them? If you have the answer, let me know when I wake up…
Continue Reading -->Weekly Sentiment Update: Why the Bears May Fuel New All-Time Highs
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, the overall mood of traders shifted to neutral from the prior week’s extreme bearishness. With the healthcare vote, earnings from AAPL/AMZN/FB/TSLA, and the April nonfarm payrolls report out of the way, let’s see how traders are feeling ahead of this weekend’s French election. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread: Bullish The VIX dropped under 10 this morning, and the 3-month spread is at +3.98. This means that traders are fairly bullish. 2) CNN Fear & Greed Index: Neutral The Fear & Greed Index is at 45, down from 48 last week. F&G operates on a 1-100 scale, and a reading of 45 means traders are neutral. 3) AAII Sentiment: Neutral The latest AAII Sentiment Survey shows that 38.1% of individual investors are bullish,basically unchanged from last week. This is right in-line with the long-term average of 38.5%. 4) CBOE Equity Put-Call: Bearish The CBOE Equity-Put Call ratio was at 0.77 yesterday with a 3-day moving average of 0.69. This indicates that traders are bearish. 5) ISE Sentiment: Bearish The ISE Sentiment Index is at 65 as of the Thursday close (65 calls bought for every 100 puts). The 10 day moving average is just 88.2. So the recent trend shows higher put option demand. The big drop ahead of Friday’s NFP report has me slotting this number in at bearish. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 2 neutral 2 bearish So traders have gotten more negative since last week, when we had 1 bullish, 4 neutral, and 0 bearish sentiment indicators. Last week, I wondered whether sentiment was about to go full-on bullish, but we saw precisely the opposite occur. Traders actually got more bearish, which is vert encouraging for the bulls. Judging by yesterday’s surge in put option demand (as indicated by the CBOE equity put-call ratio and the ISE Sentiment Index), traders were hedging aggressively for today’s NFP report and this weekend’s French election. This means there’s a lot of bearish bets that will need to be unwound in a jiffy if we get a Macron victory in France. I don’t think Marine Le Pen can be counted out until the final vote is tallied, but it certainly looks like Macron is in the driver’s seat. Call me crazy, but I think SPX makes new all-time highs above 2401 by Monday at 9:45 a.m. ET. (not that 8 points is a meaningful move in the grand scheme of things…)
Continue Reading -->Sami Abusaad: Why You Need to Know the Only 4 Stages of Market Movement
If you want to be an expert swing trader, then you have to understand the Foundation of stock movement, broken down into 4 clear stages: Ambivalence Greed Indecision Fear In our latest swing trading tutorial (scroll down to see it), T3 Live’s Director of Education Sami Abusaad breaks down each of these 4 stages so you can understand The Foundation — or the entire life cycle — of price movement. Most traders are not even aware these stages exist. But once you understand how they work, you’ll start viewing the market action through a clear new prism. You’ll see how greed and fear show their hands through price and trend action. So watch this video today and learn: Which market stage offer the highest reward relative to risk How to pick the best stocks for swing trading The single most important trading picture you may ever see Why Sami doesn’t try to buy at the exact bottom and sell at the exact top The right time to start putting on buy setups What to do when a stock goes climactic to the upside What to do when a stock goes climactic to the downside The danger of the “Fear of Missing Out” Why you can’t wait to be 100% sure to get in The type of behavior that leads to climactic tops
Continue Reading -->Do You Need a Trading Intervention?
There are a million courses and instructional videos on chart reading, economics, fundamentals, and quantitative analysis. Most traders come up through the ranks by taking information from various sources and mixing it together to create an individual path. You don’t need to be original or overly creative to be a great trader. You must simply be able to curate strategies that work for your personality and trading style. But the ugly truth is that a lot of trades desperately need a wake-up call. Sometimes, we think we’re putting things together in a very rational and controlled fashion, but we’re still not getting the result we should. That’s often a failure of mindset rather than of intelligence or natural trading acumen. So we put together a list of 9 clear signs that you need a trading intervention. If you suffer from 1 or more of these symptoms, then it’s time for a gut check! 1) You Suffer from Brain Freeze (and we don’t mean the ice cream kind) You do your best to learn a strategy or methodology, but when it comes time to implement it, you freeze up and do nothing. Quite often, traders are more comfortable with the idea of risk than risk itself. When traders find themselves freezing up, it often makes sense to dramatically cut position sizes to get acclimated to executing real trades. 2) You Make Conscious Errors You realize that you are doing something that does not fit into a logical strategy, and yet you do it anyway. This is a bizarre mix of anxiety and arrogance, as it’s based on two illogical beliefs: that doing something is always better than doing nothing, and that things will miraculously work out in your favor. Both are wrong on all counts. 3) You Are Underconfident You exit winning trades too early, stunting the potential of your winners. As unusual as it seems, traders often have difficulty letting winners run. Many traders want the security of having locked in a gain, which means they miss the bulk of a move. The best traders look for clear signs of exhaustion in trends before exiting winners, because trends often last longer than may seem logical. 4) You Have Too Much Patience You exit trades too late, allowing your winners to turn to losers, and losers to turn into bigger losers. This comes back to the belief that things will somehow just work out. Many traders have a problem with wanting more! more! more! out of a winning trade, even after it’s showing signs of of change in trend. So they’ll let emotion take over, and they’ll watch a position decline in the hope that it will magically turn around and restore prior gains. Traders also sometimes have a hard time dealing with losses, so they’ll sit and wait for them to turn around, even when they have no rational reason for doing so. 5) Not Enough Patience You chase trades aggressively, giving yourself bad entries, which eventually causes you to get stopped out. The fear of missing out is pervasive among traders. We see a stock go up $10 and we start to wonder if it’s going up another $5. A smart trader accepts that sometimes, trades just pass you buy. You’re never going to catch them all, and trying to do so means acting out of emotion instead of logic and analysis. 6) You Don’t Take Responsibility for Your Results You blame others for your problems trading problems instead of taking responsibility. We can’t control anything in the markets beyond our own strategies and risk management techniques. But since we all consenting adults engaging in an uncertain business, we must accept responsibility for our own results. We’ve all stepped into this arena by choice. So we must own the consequences — both good and bad. 7) Your Stop Get Hit Constantly You are dying of a thousand paper cuts, getting stopped out constantly, which adds up to huge losses. Many traders set extremely tight stops, which is death in today’s volatile, algorithm-driven markets. There is a misplaced belief that hard stops ensure limited losses, but that’s not always the case. A stop strategy must be adapted to current market conditions, and if you are getting consistently stopped out, you must reassess your thresholds. Quite often, traders that suffer from an overload of stop losses find that they’d actually have profited if they’d held on a little bit longer, or set their stops a little looser. 8) You’ve Forgotten That Trading Is Work It’s easy to view trading as an unstructured entrepreneurial adventure rather than a job. It takes a big streak of independence to become a trader. But beware of too much of a good thing. Traders often find themselves living an unhealthy lifestyle, including bad sleep habits, heavy hunk food intake, and zero exercise. If you want a healthy trading mind, you must take care of our body of first so you can show up ready to work effectively every day, just like any other job. When you’re tired, unfocused, and unprepared, you are throwing money away. 9) You Are Not Compartmentalizing We all have life problems. But when we trade, they must be put away to be dealt with later. You must be focused on the task at hand. You can’t be thinking about the fight you had with your spouse the night before or how you’re going to make the next mortgage payment. So when it’s time to trade, stay focused on the task at hand.
Continue Reading -->Our 10 Top Articles of April 2017
With April 2017 coming to a close, let’s take a quick look back to our 10 most popular articles of the month, as judged by our internal website statistics. We’ve got everything from education on the VIX to technical analysis tips to Scott Redler’s latest appearance on CNBC’s Fast Money. Enjoy them! 10) What is the VIX? And How Can I Trade It? – April 20 Learn the basics of the VIX, and how you can trade instruments based on the VIX. 9) How the 3-Bar Rule Can Help You Deal with Failed Setups – April 10 Learn to avoid setups that look like they are triggering, but actually fail. 8) Oh Snap! A Unique Options Opportunity Presents Itself – April 18 Snap options looked unusually priced ahead of the May earnings report, presenting an opportunity to place an interesting options trade. 7) Jeff Cooper: Gold $1262 Is the Level to Watch – April 10 Jeff Cooper breaks down the levels you need to be watching in gold. 6) 9 Tips for Picking the Right Stocks for Swing Trading – April 4 As a swing trader, one of the most important decisions you’ll every make is choosing which stocks to trade in the first place. 5) How to Use the VIX Curve to Judge the Market’s Mood – April 17 The VIX isn’t very useful as a market indicator. But looking at the curve can tell you a lot about the market’s mood. 4) 7 Interviews with 7 Top Traders – April 1 Get to know 7 of our top traders, including Sami Abusaad, Kurt Capra, and Mark Harila in this exclusive interview series. 3) Jeff Cooper: Why a Big League Market Reversal Could Happen – April 6 Technical analysis maestro Jeff Cooper identifies market levels that could signal a major change in trend. 2) 17 Killer Tips Every Momentum Trader Should Know – April 3 Most successful traders are highly disciplined. So to help you get better momentum trading results, we’ve put together a list of 17 handy rules that will keep you out of trouble. 1) Scott Redler: 4 Charts You Need to See – April 10 Scott Redler laid out his case for the banks on CNBC’s Fast Money. Here are the 4 charts he used to break down the action.
Continue Reading -->Weekly Sentiment Update: The Bears Are Disappearing!
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. Neither side ever provides real evidence of their views. But let’s look at the actual numbers to see how the crowd actually feels. Last week, traders were undeniably bearish. Specifically, they were loading up on put options like there was no tomorrow, which provided a ton of upside fuel after Macron scored a victory in the first round of the French Presidential election. So let’s see if sentiment has lifted with this week’s surge, which drove the Russell 2000 and Nasdaq to fresh all-time highs. (click here for a primer on the 5 sentiment indicators listed below) 1) VIX Spread – Bullish The VIX has dropped like a rock this week, and the 3-month spread is at 3.27. This means traders are moderately bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is now at 48, up from just 34 last week. F&G operates on a 1-100 scale, and a reading of 48 is smack in the middle, meaning traders are neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 38% of individual investors are bullish, a huge jump from last week’s 25.7% reading. While this is a major jump, it’s right in-line with the long-term average of 38.5%. So it’s neutral. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.63 yesterday with a 3-day moving average of 0.62. This indicates that traders are neutral. This is a pretty big decline from late last week, when traders were scooping up puts like there was no tomorrow. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 92 (92 calls bought for every 100 puts). The 10 day moving average is just 88.4. So the recent trend shows higher put option demand. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long that I’ll count these readings as neutral. One thing to keep in mind: for the past few months, I’ve found that the ISE Sentiment Index hasn’t been terribly helpful in terms of judging sentiment. I believe its measurement methodology is very well thought-out, but even so, the results haven’t been all that helpful. I wrote more about that topic here. So I’m taking the time to consider swapping it out with another indicator. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 0 bearish 4 neutral This is a big change from last week, when we had 0 bullish, 4 bearish, and 1 neutral. So we went from stretched markets with bearish sentiment, to even more stretched markets with neutral sentiment. Now, the big question is whether sentiment’s about to go full-on bullish. We’ll know more tomorrow. After the close today, we’re getting an avalanche of earnings from the likes of Google (GOOGL), Amazon (AMZN), Starbucks (SBUX), and Intel (INTC), all of which are major Nasdaq components. Incidentally, those reports should also dictate whether SPX is about to vault over the prior 2400.98 all-time high set on March 1. And don’t forget, #1 index heavyweight Apple (AAPL) reports on Tuesday, and it too will play a key role in the near-term action. So keep an eye out — if we get stronger equity market action in the next few days, sentiment could head to full-on froth!
Continue Reading -->Which ETF’s Should You Be Trading?
The ETF industry is HUGE. According to the Investment Company Institute, as of February 2017, we have 1,736 ETF’s to choose from, with total assets of $2.7 trillion. There’s an ETF for everything. Yes, we all know about SPY and QQQ and IWM, but did you know that there’s an ETF for lithium? That’s right, you can ride the lithium market with the Global X Lithium (LIT) fund. Into livestock? Then check out the iPath Dow Jones-UBS Livestock Subindex Total Return (COW). (h/t to RothIRA.com) Heck, there’s even an ETF that invest in ETF companies… albeit not very well. To help you make sense of the endless array of ETF’s available to you, we’re going to give you 5 basic ground rules to keep you away from the worst of the ETF lot. 1) If It’s New, Tiny, or Illiquid, Stay Away New ETF’s tend to be expensive and illiquid, with plenty of alternatives that are already on the market. Plus, a hot new fund may not actually ever garner enough assets to stay in business. So why bother with them? According to ETF.com, once a fund surpasses $50 million in assets, it’s far likely to close, so that’s a decent benchmark to keep in mind. However, we’d suggest upping your minimum requirement to $250 million to reduce the likelihood of a fund closure during times of extreme market stress. And if you’re an active trader, look for funds that trade over 1 million shares per day. This will ensure you can get in and out of them without too much trouble. 2) Forget Those Highly Specialized Sector Funds As with many new ETF’s, highly specialized sector funds are usually not worth trading. Specialty funds are typically more expensive and less liquid than generalized funds with similar performance characteristics For example, the Bioshares Biotechnology Clinical Trials Fund (BBC) sounds exciting, but it trades less than 13,000 shares a day. It also has an expense ratio of 0.85%. The iShares Nasdaq Biotechnology ETF (IBB) trades over 1 million shares per day with an expense ratio of 0.47%. Here, you can see a chart comparing IBB (bars) to BBC (purple line): They look pretty much the same, though BBC has been more volatile and a weaker performer over this 2-year time frame. 3) Know What You Own Before trading an ETF, you should actually make sure it fits your trading and investment objectives. Always look at a prospective fund’s underlying holdings, because you can’t always rely on a fund’s name to determine what it owns. For example, the SPDR Homebuilders ETF (XHB) is more of a retail/building supply ETF than a homebuilders ETF. Only 1 of its top 10 holdings is a homebuilder, and the biggest position is Williams-Sonoma (WSM)! And if you’re playing with anything fancy like leveraged ETF’s or VIX-derived products like VXX and TVIX, run, don’t walk, to the prospectus. Quite often, these complex products have significant tracking errors and other risks of which you should be aware. 4) Check Your Free Options Many large brokerage firms allow you to trade certain ETF’s for free. Every dollar you save on commissions is another dollar that stays in your pocket, so why not look into your free options? For example, Fidelity offers commission-free trading of the popular iShares ETF’s. TD Ameritrade also offers free trading of select ETF’s from iShares and Vanguard. However, there are two caveats to keep in mind: there are usually some restrictions with free ETF trading, like a minimum 30-day holding period. And secondly, some ETF’s offered in commission-free trading programs aren’t exactly top-shelf offerings. Occasionally, you’ll come across a fund that has very little liquidity and a high expense ratio, which you’ll want to avoid. 5) Stick With the Establishment Most of the time, it makes sense to stick with the industry giants like Vanguard, iShares, State Street SPDR, and PowerShares. In all likelihood, these companies will stay in business and remain very profitable for a very long time. And because of rampant competition, fees just keep going lower and lower. Plus, funds from major ETF companies, allowing you to get in and out of the market at will. It’s just one of those cases where bigger is almost always better.
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