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.

Parkway Holdings

Price of Parkway Holdings retreated from the $3.92 high set on 11 Jun 2010 to close at $3.62 on Friday. The closing price is lower than the $3.78 a share partial offer from Khazanah Nasional Bhd.

The technical chart is showing weakness in the short term. MACD indicator is now below its signal line. RSI is dropping from overbought levels and stochastic indicator is also showing further weakness ahead.

The price chart looks set to close the gap that was formed when Khazanah Nasional Bhd announced their partial offer for Parkway shares.

The only way for Parkway share price to go up is for Fortis Healthcare to come up with a better offer or if Khazanah Nasional revised its own offer to entice shareholders.

Given the fact that Parkway is now trading at 25.85 times FY2010 PER, it is not exactly cheap to buy the shares at this point in time. A better entry point will be at $3.56 which is the price that both Fortis and Khazanah paid for their stake in Parkway.

STI At Critical Levels

Volatility is back in the market. Dow went to 9787 levels during Thursday session, showing us how ugly the market can get when bad news hit the market especially when we have such a huge rally that took us from the March 2009 lows till the April 2010 highs.

For the STI index, the initial knee jerk reaction took the index below the up trend channel line. The index managed to recover some early losses and is now at 2821 level. This level is close to the up trend channel line.

Given Dow’s performance on Friday, it looks likely for the index to test 2700 level soon. If this support cannot hold, then the next critical level is 2424.

Sell In May And Go Away

The stock market has a famous saying of “Sell in May and go away”. Should you be doing it this year?

A look at the STI index from 1988 to 2010 shows that there is a 50-50 chance that the market will go down from May to Oct. The performance of the STI index is shown in the table below

Entry Date	Entry Price	Exit Date	Exit Price	% Change
4-May-88	972.70	4-Oct-88	1005.30	3.35
3-May-89	1284.90	3-Oct-89	1388.30	8.05
3-May-90	1465.90	2-Oct-90	1137.20	-22.42
3-May-91	1546.00	3-Oct-91	1359.40	-12.07
5-May-92	1488.70	2-Oct-92	1352.20	-9.17
4-May-93	1790.90	4-Oct-93	2018.10	12.69
4-May-94	2310.60	4-Oct-94	2348.50	1.64
3-May-95	2072.10	3-Oct-95	2120.20	2.32
3-May-96	2404.50	2-Oct-96	2172.00	-9.67
5-May-97	2020.40	2-Oct-97	1945.00	-3.73
5-May-98	1476.40	2-Oct-98	913.57	-38.12
4-May-99	1915.49	4-Oct-99	2056.10	7.34
3-May-00	2162.23	3-Oct-00	1956.15	-9.53
3-May-01	1747.53	2-Oct-01	1329.63	-23.91
3-May-02	1737.75	2-Oct-02	1378.34	-20.68
5-May-03	1310.74	2-Oct-03	1647.74	25.71
4-May-04	1838.53	4-Oct-04	2001.18	8.85
4-May-05	2141.86	4-Oct-05	2305.63	7.65
3-May-06	2643.14	3-Oct-06	2593.59	-1.87
3-May-07	3444.66	2-Oct-07	3826.41	11.08
2-May-08	3147.79	2-Oct-08	2358.91	-25.06
4-May-09	1920.28	2-Oct-09	2657.44	38.39
				-49.16

If you buy into the STI on May 2009 and sell on Oct 2009 instead, you would have seen gains of 38%. However if you sum up the performance from 1988 to 2010, you will be down 49%.

So should you be a buyer this May or seller? Personally, I will not be a buyer as my feel is the index will not see double digit percentage gain and the risk of a correction is high.

Vortex Indicator

The Vortex Indicator was developed as a new directional movement indicator. It is very similar to the directional movement indicator that originated from J. Welles Wilder.

The calculation of the index involves 8 steps.

1. Compute +VM = ABS(Today’s High – Yesterday’s Low)

2. Compute –VM = ABS(Today’s Low – Yesterday’s High)

3. Compute True Range

4. Compute A = sum of +VM for the past N days

5. Compute B = sum of –VM for the past N days

6. Compute C = sum of True Range for the past N days

7. +Vortex = A/C

8. –Vortex = B/C

The way to interpret the vortex indicator is similar to +DI and –DI indicators. When +Vortex is above –Vortex, the trend is bullish and when the reverse occurs, the trend is bearish.

Taking Wing Tai Holdings as an example, you can see clearly how the Vortex indicator captured the up swing and down swing respectively.

For more information on Vortex indicator, please refer to Technical Analysis Of Stocks & Commodities Magazine.

STI Statistics For Mar

Dow managed to close at 10,566 points on Friday, moving up 122 points. Nonfarm payroll for February came out better than expected. 36,000 jobs were lost compared to an expected decline of 68,000.

In Singapore, the STI index managed to close on higher grounds on Friday as well with the index closing at 2790.

The performance of STI in Mar is slightly favorable to the Bulls. Going with trading data from 1998 to 2009, there were 13 winners in the month of Mar versus 9 losing “Mar” months. In terms of percentage, the biggest gain of 7.42% was attained in 1999 whereas the biggest loss of 13.89% was established in 2001.

Entry Date	Entry Price	Exit Date	Exit Price	% Change
1-Mar-88	890.3	5-Apr-88	926.8	4.1
1-Mar-89	1105.80	3-Apr-89	1187.30	7.37
1-Mar-90	1546.10	2-Apr-90	1549.20	0.2
1-Mar-91	1463.00	2-Apr-91	1480.50	1.2
2-Mar-92	1460.50	1-Apr-92	1394.10	-4.55
1-Mar-93	1665.30	1-Apr-93	1668.60	0.2
1-Mar-94	2342.70	4-Apr-94	2080.90	-11.18
1-Mar-95	2126.70	3-Apr-95	2093.10	-1.58
1-Mar-96	2438.50	1-Apr-96	2387.30	-2.1
3-Mar-97	2195.70	1-Apr-97	2072.50	-5.61
2-Mar-98	1616.00	1-Apr-98	1629.50	0.84
1-Mar-99	1414.56	1-Apr-99	1519.58	7.42
1-Mar-00	2129.17	3-Apr-00	2135.76	0.31
1-Mar-01	1935.75	2-Apr-01	1666.90	-13.89
1-Mar-02	1716.96	1-Apr-02	1806.62	5.22
3-Mar-03	1278.35	1-Apr-03	1260.03	-1.43
1-Mar-04	1898.09	1-Apr-04	1856.80	-2.18
1-Mar-05	2120.94	1-Apr-05	2141.38	0.96
1-Mar-06	2472.03	3-Apr-06	2542.77	2.86
1-Mar-07	3133.88	2-Apr-07	3240.07	3.39
3-Mar-08	3026.45	1-Apr-08	3007.36	-0.63
2-Mar-09	1594.87	1-Apr-09	1699.99	6.59
1-Mar-10	2750.86	Open	Open	1.43