Selecting the Best ETFs to Trade Each Day, Part 2
On Thursday we looked at Part 1 of how to choose which ETFs to trade when many are signaling at the same time.
The ranking we use is country funds over sector funds and sector funds over commodity, currency and bond funds. Here’s why.
First, all ETFs have quantified short-term reversion to the mean characteristics to them. When you see the results from our upcoming book, High Probability ETF Trading, you’ll see that using a basket of 20 of the more popular and liquid ETFs, each has shown that they consistently have moved from overbought to oversold and vice versa over and over again at predictable times since each has gone public (this goes all the way back to 1993). That’s what makes ETFs so appealing for trading.
When you dig deeper, you’ll see though that not all ETFs are created equal. Commodity ETFs for example, tend to trend more which means they reverse a bit less. They don’t reverse as well as the sector ETFs which tend to reach overbought and oversold territory quite often and then reverse, setting themselves up nicely to trade, especially over a 3-5 day period.
Country funds reverse the best. And they do for a number of reasons but in my opinion, its mostly due to the fact that countries don’t rise forever or drop forever (in spite of what the gloom mongers want to have us believe). As we have seen throughout the Daily Battle Plan, most country funds get overbought when they are below the 200-day and then eventually reverse. Not all the time of course, but historically its been a high percentage of the time. And historically this has been even truer on the long side when they are above the 200-day, pullback and then reverse higher back in their longer term direction.
I like trading country funds for these reasons. And when given a choice as to which ETFs to place into your trading portfolio each day, having a ranking order like the one above which is backed by years of statistical evidence is a solid place to start your selection process.
This is from Larry Connors Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.