Starting to Trade ETF: the Most Effective Strategies

People who are just starting their trading careers are often faced with the need to select the assets on which to focus their operations in the initial stages. Exchange-traded funds (hereafter referred to as ETFs) are among the most common options to which their choice often falls. Their status as a perfect asset for newbies is ensured by a set of undeniable benefits inherent in these funds, including the low threshold required for investment, considerable liquidity, a wide variety of investment options available with them, accessible expense ratios, and many other features. However, in order to get the most out of these benefits, traders must be able to properly organize their efforts through a sound and appropriate strategy. This article will discuss the most common strategies that beginners can apply when trading ETFs.

Strategy 1. Asset Allocation.

Differentiate your assets within the ETF field. If you work with these funds, you are able to deal with a wide variety of particular asset groups, including bonds, equities, currency, commodities, and so on. Therefore, you can allocate some segments of your portfolio to different categories, ensuring diversification of your investments. For example, you can balance equity and bond ETFs in equal portions to ensure your income’s safety and stability while still achieving high return rates. 

Strategy 2. Sector Rotation.

To increase the reliability of investments and reduce risks, traders may, from time to time, change the sectors in which they are involved. Having received profits from one sector, you can invest them in another area, such as the one that is more reliable and less risky. In this way, you reduce the chances of financial losses associated with the cycles of efficiency fluctuations that some sectors regularly go through.

Strategy 3. Hedging.

For investment novices, risk mitigation in the early stages may be even more important than making immediate high returns in the first few weeks. Therefore, they can turn to hedging as one of the most effective strategies to reduce such risks. Within this strategy, you can balance the risk of a particular adverse event by investing in the opposite area so that the return will cover the risks if an undesirable event does occur. Hedging is an effective insurance strategy; however, you should not forget that simultaneously investing in two opposite areas will inevitably reduce your profits.

Strategy 4. DCA. 

The application of DCA (which is an abbreviation for “Dollar-Cost Averaging”) is one of the most common, straightforward, and yet efficient investment strategies for newcomers. Within this strategy, you regularly purchase a fixed volume of ETFs, regardless of whether their prices have changed or not. Regularity and repetitive acquisition volumes are the crucial elements ensuring this strategy’s efficiency. In the long run, DCA will balance the changing cost of an asset caused by its price volatility.

Strategy 5. Swing Trading. 

In terms of swing trading, an investor uses considerable swings in the price of stocks and commodities. In trading, fluctuations of various kinds are widespread. In case of understanding the approximate patterns based on which these processes develop, you will be able to benefit most from them by purchasing assets and holding them for a certain period (usually longer than the one during which day trading takes place) and then selling these assets at the best price. Given the high level of diversification to which ETFs are subject and the narrow gaps between bids and asking prices, they are a suitable tool for swing trading.

Strategy 6. Short Selling. 

The strategy of short selling relies on a specific procedure in terms of which a trader borrows a security and later vends it back when the price is expected to be lower. This procedure could be pretty risky for a newcomer. However, it is still less threatening to a trader’s finances than shorting one’s stocks. Besides, in case of not putting too much at stake, you can risk and get involved in this investment activity to diversify your portfolio and look for new ways of obtaining funds. 

Strategy 7. Using Seasonal Trends to Your Advantage.

Various seasonal trends regularly affect the markets. For example, it is well known that in the United States, equities perform worse between May and October than during the rest of the year. Therefore, experienced traders often sell their assets in May and do not return to the investment game until November. Another example of a seasonal trend is the rising cost of gold in the first two autumn months. Beginners can take these trends into account and use them to their advantage. However, trend exploitation requires them to substantially study the patterns and monitor their more experienced counterparts’ functioning.

Final Words.

Numerous positive characteristics of ETFs make them an excellent tool for beginners to enter the investment sphere. By applying the seven strategies described above, beginners will have every chance to enter the field of trading effectively. At the same time, knowledge of strategy alone is not enough to succeed. The right choice of broker and the practical refinement of these strategies through real-life operations or simulations are also essential. With the demo mode and detailed guides provided by broker Evotrade, you will be able to master these strategies quickly and easily to successfully enter trading. Remember that practice makes perfect. Therefore, if in the first stages you will face inconveniences and failures, do not give up. It will change if you’re persistent enough. Good luck in mastering ETF trading!