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ETF Trading Tips: Strategies All Beginners Must Know

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Exchange Traded Fund or ETF is a market security that tracks other market securities like index, commodity, bond or a basket of assets. This security trades on a stock exchange like a common stock unlike mutual funds. It can be bought and sold throughout the day which is the reason behind frequency in the change of prices. As it offers higher liquidity, low investment threshold and lowers expense ratio, ETFS are attractive investment options for individual investors.

 If you are starting out as a trader or as an investor, investing in exchange traded funds is ideal due to the benefits they offer. There are many investment choices and options for diversification when you invest in this market security. In case you are a beginner in the ETF market, you need to know some trading and investment strategies that help you to strengthen your trading career. Here are a few strategies that have been discussed below.

As a beginner, you might have to hedge against the risk. Hedging, or protecting, is very important in the volatile market conditions, especially if a risk is acquired due to inheritance. For an example, suppose you invested in the U.S blue chips. If the risk poses on the U.S equities then your investment is under risk as well. This can be avoided by using ETF to hedge.

Buying a put option is one way to protect your fund against a decline. If you are not familiar with options trading strategy yet, you can use an alternate strategy, i.e. to take a short position in a broad market ETFs like SPDR S&P 500 or SPDR DIA. In case there is a decline in the blue chip investment, it will be hedged effectively by your gains in the short position. ETFs are an easy and efficient way to hedge especially for those who are new to trading and investment.

Asset Allocation
Exchange traded funds requires low investment. Therefore, it is easy for the beginners to implement an asset allocation strategy that is most basic and simple. Asset allocation is allocation of a portion of portfolio to different stock categories to diversify their investment.  This is a very powerful investment tool. You can use the asset allocation strategy keeping your risk tolerance capacity and investment time horizon.

For example, if you are an investor in your 20s, you have a long investment time horizon. You will also have higher risk tolerance in comparison to the investors nearing retirement or those in their 30s. In this situation you can invest all your money in equity ETFs.

Swing trading
ETFs are suitable for swing trades because of their diversification and tight bid and ask spreads. Swing trading helps the traders and the investors to take advantage of profitable swings in stocks or other instruments. They take a few days to a few weeks to turn into a profitable trade.  Beginners can choose to trade ETF from the wide range of sectors and classes available to them.  They will be able to benefit from the upward price movement and they can also protect themselves from risk by diversification.

Apart from the above mentioned strategies, there are other strategies like short selling which might require a certain level of expertise to perform. Thus, many experts suggest that first traders use the above mentioned strategies and gain some experience in the ETF trading before implementing other strategies.

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