Tradecraft – The Trouble With ETFs

TRADERS BELIEVE THERE’S money to be made, somewhere, in any market environment. You’ve got to be where the action is. And because there are numerous times in which individual sectors trend while the broad market treads, sector allocation has become a hot concept among investors and money managers alike.

To suit the sector-allocation crowd, Wall Street has developed a number of sector-based exchange traded funds, known broadly as ETFs, which give you exposure to an entire sector or industry simply by buying a single share. Marketed as iShares, Sector SPDRs or StreetTracks, the products are essentially open-ended mutual funds that trade throughout the day, just like stocks. These sector-based ETFs have all sorts of interesting advantages over both individual stocks and mutual funds. But they also aren’t quite what they appear to be, and that can pose problems for investors who buy them thinking they’re getting something they aren’t.

First introduced in the early 1990s with the successful listing of the Standard & Poor’s Depositary Receipts (or SPDRs, pronounced “spiders”) on the American Stock Exchange, ETFs have become some of the hottest investing products on the Street. The American Stock Exchange, where most ETFs trade, has become virtually dedicated to supporting and developing these rapidly growing tools. There are well over 120 ETFs now trading, with more being introduced almost on a daily basis. (more…)

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Thought of the Day (November 15, 2009)

The typical trader will do most anything to avoid creating definition and rules because he does not want to take responsibility for the results of his trading. If he knows exactly what he is going to do and under what conditions, then he would have something by which to measure his performance, thus making himself accountable to himself. This is exactly what most traders don’t want to do, preferring instead to keep their relationship with the market somewhat mysterious.

This creates a real psychological paradox for traders, because the only way to learn how to trade effectively is to make oneself accountable by creating structure: but, with accountability comes responsibility.

– Mark Douglas, The Disciplined Trader: Developing Winning Attitudes

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Thought of the Day (November 14, 2009)

If a speculator is correct half the time he is hitting a good average. Even being right three or four times out of ten should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong.

– Bernard Baruch

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Thought of the Day (November 13, 2009)

Positions either perform, or they get eliminated. End of story.

– Gordon Gekko

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Tradecraft – It’s All in the Follow-Through

LIKE A NEW LOVE, the beginning of a journey or a fresh hand of cards, the first trade in a particular stock is exciting and seemingly rife with possibilities. But the toughest and most important trade you make is actually the second one. Happy relationships, smooth travel or winning blackjack all require skillful reaction to changing circumstances — and so does successful trading. What matters is the all-important follow-through. In every market and with every product, managing a trade is even more important then making it in the first place.

Anybody can buy a stock. It’s how you manage the fallout that matters. Lots could happen: The economy could slump. Or interest rates could rise. The company’s sales could falter, or its CEO could get run over by a bus. This is the problem with following the fundamentals. It means concerning yourself with things that are far out of your control.

What really matters ultimately is the price action of the stock itself. When you buy XYZ at $50, there are only a few possible outcomes. XYZ could go up, down or go nowhere at all. We will briefly outline what I believe to be the time-tested rules for what to do next.

Let’s assume XYZ rises to $55, whether thanks to prayer, skill or just plain old luck. Even in a tough economy with soggy stock indexes, there’s always a bull market somewhere. You’ve got a winner on you’re hands, so forget the headlines. You’re up five points on XYZ…what’s your next trade? (more…)

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Thought of the Day (November 12, 2009)

The only real mistake is the one from which we learn nothing.

– John Powell

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Thought of the Day (November 11, 2009)

As the playing field is leveled for investors and trading professionals alike, technocrats are rapidly losing their competitive edge. Soon everyone will have the same technological edge in the financial world. Inner space is now the new frontier. As a result, the keys to financial success are rapidly shifting from the left-brain to the right-brain – from 80 percent technology and rational solutions, to 80 percent mind games, intuition, mental discipline and the techniques of mass psychological “warfare.”

– Paul Farrell

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