Momentum Strategies for ETF Traders

[Andrews Wright]

ETFs are one of the most preferred ways to invest. They are easy, cost-efficient and provide diversity over product availability. Momentum traders who cash the strong price movements keep their eyes on ETFs. Momentum trading chances arise due to the trends that take over the market. Momentum traders can also benefit from the shift in the momentum. For example, a stronger buying takes place after a sharp decline. The momentum traders are interested in the trading instruments in news. They believe the trend will continue its move in the same direction.

 

As generally, momentum traders operate during the day, there are a few intraday strategies that help the traders to capitalise the trend. But these strategies can be used in long term trends as well. Here are some strategies that I use:

 

Relative weakness momentum strategy

This strategy compares price movement of one ETF to another. When two ETFs are declining in the market that is bearish, it is a signal that traders should go short. In this case, the traders must select the ETF that is performing the weakest and other traders are hesitant to own it. Before you make the entry on the chosen ETF, make sure that the overall downtrend is in right place. If you are wondering how to find the entry point, don’t worry. An expert of easy markets has a simple trick that can be very helpful to traders. He says, “You can draw a trend line where falling price starts to pulls back its move. You can enter on the point when the price breaks the trendline and resumes the declining path.” This is a simple yet effective method. This method can also be used in an uptrend. You will have to look for the strongest performing ETFs.

 

Bullish momentum strategy

This strategy is applied when momentum indicator reaches the extreme level. The momentum indicator is set at 12 day by default. Although signals are generated when the prices are fluctuating near 100, these signals are not reliable. The signals generated at extreme levels are reliable. This is because at levels like 110 and above or 90 and below levels signal over extension of price and hint a turning point.   But you should never make your decisions just based on these signals. Rather, you should look for divergence along with extreme levels in momentum indicator. Once you set up the divergence, you can draw a trendline on momentum indicator and then get the trigger to go long once the trend line is broken. This can also be a good shorting strategy.

 

RSI Strategy

When the ETF appears to be trendless and stays within a range, the range that is occurring can be confirmed with the help of RSI indicator. This helps the trader to identify the point when trending begins. When the RSI is set at 14-day period, it will fluctuate between 80 and 20. And this happens if the price of ETF moves within a price band over an extended period of time. The RSI may be restricted to 50, if the trading is choppy. When RSI is fluctuating between the 80 and 20 ranges, you should stay away from momentum strategy. It is better to use ranging strategy. The market can be entered during the uptrend or down trend, if the traders use entry and risk controlling methods.

 

Momentum strategies can be based on price or indicator and can be applied in uptrend or down trend to maximise trade opportunities. These are the strategies that I follow; tell what you think about them and what are the momentum strategies you use.