Short-term trading is more difficult than long-term investing, in my opinion.
The reason is that short-term traders need to have a winning strategy and an excellent tactical plan.
Strategy is the big-picture objective. For long-term investors, the strategy is to simply buy undervalued stocks, hold them for years and then sell at a profit.
For short-term traders, the strategy is to find unique signals that have a probability of success and trade those signals. More complicated, but more frequently rewarding.
For both groups, tactics are their plan for entering and exiting trades. And especially for short-term traders, it’s important to optimize these entries and exits.
Given that they plan to hold for years, tactics aren’t as important for long-term investors. If they pay an extra dollar to open a position, they may have to hold a position a few extra weeks to exit. But a few weeks in a strategy that measures holding periods in months isn’t significant.
In short-term trading, tactics can determine success. That’s because these traders will be selling shortly after they enter a trade. If they pay too much, the exit signal will come before they had a chance to overcome the costs of a bad entry price.
While tactics are important, there are some simple plans successful traders use.
The simplest plan is to buy or sell when other traders are trading. Let me explain what that means in practice.
The Right Time to Trade ETFs
ETFs tend to trade the most near the open and close. That’s because of the way institutions use ETFs.
Institutions can effectively buy an ETF by delivering shares of the stocks in the ETF’s portfolio to the fund manager. They can sell by accepting delivery of the shares in the underlying portfolio. This process, which is only available to large institutional investors, can help them save money on taxes.
There tend to be more of these trades near the open and close, as large investment managers adjust their portfolios. This creates what’s known as U-shaped liquidity in ETFs. The U tells us that liquidity is highest near the open and close and lowest in the middle of the day.
Now, you can still trade in the middle of the day. But you may pay more because low liquidity increases the costs of trading. When large investors aren’t buying and selling, the market makers charge all investors more.
We know the best time to trade an ETF is near the open or close. I prefer the close because the opening tends to be more volatile.
On October 1, I recommended two positions — Global X Lithium & Battery Tech ETF (LIT) and Global X MSCI Argentina ETF (ARGT). Assuming both were bought at the close, we have a 4.44% gain in LIT and a 0.54% loss in ARGT as of yesterday’s close. Equal-sized positions in both ETFs show a gain of 1.95%, a little more than the S&P 500’s gain of 1.90%.
So far, our strategy is beating the market by a small amount. I’ll be adding positions and updating you on this strategy in the coming weeks.
And on Tuesday, I will be writing about different tactics for options traders, ones that are essential to understand when facing the aggressive market makers in the options market.
Michael Carr, CMT, CFTe
Editor, One Trade
Chart of the Day:
How the 2021 Bitcoin Season
Today, we’re just gonna have a little fun with the BTC chart.
First, a disclaimer: Past performance never indicates future results — it’s the first investing rule most people learn, and it’s one of the most important.
Yet there’s also an old saying that goes, “history does not repeat itself, but it often rhymes”…
So given BTC’s recent performance, its past track record of seasonal strength in winter, looming ETF news, and a strong scent of FOMO in the air… Let’s speculate on the blow-off top for BTC in 2021 if it repeats what it did in past strong winter cycles.
Veteran crypto traders might remember October 2017 as the month that bitcoin defied the odds and pushed past its previous high of $5,000.
Pausing for just one week in early November, bitcoin essentially went straight up all the way through the second week of December, to $20,000. It was a gain of nearly 350%.
Again, just for fun, I took the bar pattern from BTC’s 2017 run and put it on top of today’s price action for a visual.
So if bitcoin did the same exact thing this time — which it likely won’t — that would give us a bitcoin top of about $280k by mid-December.
Overly ambitious? Probably. But nobody in their right mind was calling for BTC $20k in October 2017, either.
Given BTC’s much larger market cap, it’s only reasonable to expect the move this time would be less extreme. If we take the pattern from October to December 2020, for example, we can consider a price target somewhere closer to $200k.
I personally plan on selling progressively larger amounts of BTC as it crosses the $125k, $150k, $180k, and $200k thresholds, along with some of my riskier altcoin positions. By putting a plan in place now, we won’t need to try to time the top.
Folks without crypto exposure might consider some call options on bitcoin and crypto companies like MicroStrategy (MSTR), Marathon Digital (MARA), and Coinbase (COIN), dated out to January.
Managing Editor, True Options Masters