Are ETFs suited for trend trading? It depends, mainly on the time frame. In the short run some index or index-like ETFs may run smoother than individual stocks. A smooth run is the killer criterion for trend trading. Select a trending thing that runs without ripples and pullbacks and you have your trend riding horse.
The longer term trend. For ETFs there is a strong caveat in the long time frame. At least for all leveraged or short ETFs. These have a built in bias towards zero. The reason is much different to, say, the gravitating of penny stocks to the flat line. Some synthetic and all leveraged and short ETFs are rebalanced after each day’s close and are meant for day trading. But the issuer wouldn’t tell you so. One trading method for them is to short these ETFs, well knowing that in the long run they will go down.
Strangely that could also be the strategy of choice for the private investor. If you look at long term charts for leveraged short ETFs they often sport a tremendous downtrend with an almost incredible smoothness. Still, there is the risk that every short trade involves – bad money management. You can lose more than you can win.
The best bet would be the long side for long term trading or investing. Buy something with potential or hidden potential that is currently trending.
For real short term traders who like to make intraday bets these leveraged ETFs are okay. Nonetheless they often move much more fuzzily compared to their underlying assets. And that is the second secret of the issuers. They make a good profit with arbitrage.
For the private day trader it is more difficult to make money with intraday hedges. But, you have a chance. Instead of a real arbitrage you could rely on virtual arbitrage.
The precondition is that you can monitor the real value of the underlying assets of the ETF and compute a difference chart. This chart will show some larger offset that seems to prevail more globally and a wildly fluctuating noise that resembles the intraday difference jitter of the ETF.
Try to buy cheap on this noisy jitter line and sell dear on it and you will make a virtual “jitter spread”.
If you are then able to combine this with riding intraday trends you may have your private money machine. For learning this trading technique this trading room is recommended. Together with this live advice comes a robust trading system for day trend trading.