One of the more frustrating experiences for a high probability trader is trying to trade a market
that refuses to pullback significantly. Traders typically deal with this situation, rightly or wrongly, by
looking to enter markets sooner. The problem is that this can lead to the other great
potential frustration for high probability traders: a market that pulls back further
AFTER you have already taken a position during the initial pullback.
The good news is that, for ETF traders, a strategy of scaling in to positions rather than
buying all at once is a proven way to profit from both of these potential, high
probability trading headaches. The bad news is that if you are learning these techniques
for the first time, then you probably aren’t one of those who was able to take advantage
of the excellent opportunity in the Brazilian ETF this week.
The iShares MSCI Brazil Index Fund ETF (NYSE: EWZ) had rallied to new, 6-month highs early in
March. Since then, traders and more active investors have been in a profit-taking mood,
sending the EWZ lower for eight out of the eleven trading days.
During the first leg of the decline, EWZ earned “consider buying” ratings of 9 out of 10
after dropping for three days in a row, twice finishing in technically oversold territory. This
was enough to get most high probability ETF traders off the sidelines and into the
market, sending EWZ higher over the next two sessions.
But those who had benefited from the gains in EWZ during the fund’s run-up in January and
February were not yet done with their selling. And the short-term bounce in EWZ was met
by more profit-taking, and the ETF reversed to finish lower for the next two consecutive
days, setting new, short-term lows in the process.
This renewal of the selling, however, was a boon for swing traders looking to buy
weakness and sell strength in uptrending markets. In pulling back to a new low, EWZ not
only again earned “consider buying” ratings of 9 out of 10, but also allowed more
aggressive traders to take advantage of further weakness by adding an additional unit
long (or, seen another way, adding the other half of the initial position) in EWZ.
This so-called “aggressive” approach to ETF trading actually has a number of
“conservative” real-world world aspects. For one, it typically increases the per trade
win rate of the trader or active investor who scales into a position in parts, adding a
second unit as the market moves lower, rather than all at once.
Second, this approach to
scaling in to ETF trades tends to reduce the cost basis of the trade, often resulting in
higher, per trade, gains. And third, this strategy of scaling in allows traders and active
investors to participate in both shallow pullbacks and more substantial corrections,
In the case of the iShares MSCI Brazil Index Fund ETF, traders who bought half their position
on March 6th and the other half on March 12th were able to reduce their cost basis by
just over a quarter of a percent (imagine how this can add up over hundreds of trades).
In this individual instance, with traders exiting the position into strength on March
13th, traders were able to lock in gains of more than two and a half percent.
Advanced traders using call options to take advantage of opportunities like the one in
top-rated EWZ fared even better. The April 65 calls in EWZ were priced at $3.40 on March
6th, and $3.00 on the 12th. Those calls ended trading on March 13th at $4.35. More
aggressive traders taking advantage of the greater leverage and deeper liquidity of the
out the money options market in EWZ could have bought the April 70 calls for $1.15 on the
6th, and about 77 cents on the 12th. The April 70s closed at 1.30 on March 13th.
To learn more about trading exchange-traded funds using scale-in strategies like
these, click here.
And to start trading ETFs using PowerRatings, click the link below to start your
free, 14-day, no obligation trial.
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