High Probability ETF Trading Method

ETF has become popular in overseas market, particularly the US market.  In Singapore, we are beginning to see more ETF that can be traded over the stock exchange.  However, the daily trade volume is no where near those that are traded in US.   Those that want to trade ETF may be better off doing it with a US broker.

There are numerous methods to trade the ETF.  One of the easier methods to follow it the one that is made popular by Larry Connors and Cesar Alvarez in the book High Probability ETF Trading.  The method is pretty simple and is described below:

Entry rules:

1. The ETF is above the 200 day moving average.
2. The 2 period RSI is below 25 for two days in a row.  Buy 10% of your position on the close.
3. If the prices are lower on the close than your previous entry price, any day you’re in your position, buy 20% more of your position.
4. If prices are lower on the close than your previous entry price, any day you’re in the position, buy 30% more of your position
5. If prices are lower on the close than your previous entry price, any day you’re in the position, buy 40% more of your position.

Using this 10%, 20%, 30%, 40% scaling in approach (also know as 1-2-3-4),  you now have a full position in a very oversold ETF.

Exit rules:

6. Exit on the close when the 2-period RSI closes above 70.

Dr Alexander Elder - Entries & Exits

Dr Alexander Elder is a trader and author of trading books (Trading for a Living, Come Into My Trading Room and Entries & Exits).

His explanation of trading in the book “Entries & Exits” is exceptional.

“Successful trading is based on three M’s – Mind, Method, and Money. Mind is your trading psychology; Method is how you analyze markets and make trading decisions; Money is risk control. The 3 M’s are like the legs of a three-legged stool; if anyone is missing, a person will end up on the floor.

Beginning traders, especially those with scientific or engineering backgrounds, tend to underestimate the importance of psychology.

Beginners are easily seduced by technical indicators, ut successful traders know that money management is equally important. The two pillars or risk control are the 2% and 6% rules. The 2% rule states that you may never risk more than 2% of your account equity on any single trade. For example, if you trade a $100,000 you are allowed to risk a maximum of $2,000. If the stock trade at $12 and your stop loss is at $10 then you are allowed to buy 1000 shares.

The 6% rule limits the risk in your account as a whole by stating you may never expose over 6% of your account equity to the risk of loss. For example, if you trade a $100,000 account and risk $1,000 on every trade, you may not have more than 6 open trades at any given time. “

To learn more, please read the book “Entries & Exits” by Dr Alexander Elder.