Momentum Based ETF Trading Strategy
Hello traders. Welcome to the Stock Trading Course and the 5th Module, Daytrading ETFs.
In this lesson, we are going to learn the first strategy for daytrading ETFs. And this is a momentum based strategy, and what we are going to be using here is the momentum oscillator. We’re going to use volume, we are going to use price action and technical analysis.
Now let’s go to the chart and I think…yes, we are going to look at the TQQQ ETF, which is the ProShares UltraPro QQQ ETF, which follows the NASDAQ on a three time basis. The return on this ETF is going to be amplified by three times. The first thing I want you to look at is the momentum oscillator. And if you don’t know how to use the momentum oscillator, I’m going to do a very fast rundown of the oscillator. When the oscillator goes up, it means that the momentum is going up, which means that we are going to have a move in the market, or we are having a move in the market. While when the oscillator goes down, it means that the momentum has reduced and the price is not moving. This doesn’t have overbought and oversold conditions, this is just an indicator of momentum. As you can see, we have the volume bars and we have the TQQQ candlestick chart.
Now the first thing we’re going to do is we are going to spot where price is at. And let’s assume that we are looking at price right here. It’s trading in a range, and we don’t like trading ranges with ETFs. We want actual momentum to the upside. Well mostly to the upside because if we are betting on the negative side of an asset, we are going to buy [inaudible 00:02:02].
What we are going to do here is we’re going to spot a pattern. We always spot patterns with ETFs or with the momentum strategy. The first pattern we are going to spot, or the first thing we are going to do is we’re going to look at where price is trading at. Let’s zoom out a little bit the chart, so we can look at what the ETF is doing. We have a pretty nice consolidation inside of this range. You can see that the price is respecting both support and the resistance of the range.
Now, because we don’t like trading ranges on ETFs, what we’re going to do is we’re going to look for spots where to buy the TQQQ. Now, what we’re going to do here is we’re going to use a trend line and as you can see, we do have a trend line right here that we might use for a breakout. Now, you can draw trend lines in your charts at any time but you also need to draw them on the momentum indicator, or the momentum oscillator. Now, you can see that right here we do have…well, the oscillator is making lower highs and the price action is making lower highs. We have a reduction in momentum and price is going down. This is not interesting for us. What is interesting for us is in fact when the momentum indicator breaks with this trend line.
And what is going to happen here when the momentum indicator breaks with the trend line, we are going to look at price action and we are going to see if price breaks also with the trend line. If the momentum indicator breaks with the trend line, and price breaks with the trend line, well we’re going to buy this ETF because we have a signal to buy on a spike in momentum. And of course, if this spike in momentum is accompanied by a spike in green volume, it’s also better.
So we do have a break right here on the oscillator, or the momentum oscillator. Let me just point it out for you, and at the same time, we have a break in the trend line. And I’m going to point it out with this rectangular, this square right here. So we have a break in the momentum oscillator and in the trend line, and even though we are in a range…we are at the bottom of the range, so this is a clear signal to buy this ETF.
Now, we are going to put our stop loss just below the range, just below the previous low or the range, so we are risking 1.8% or $1.71 and the first target should be the top of the range. We are going to look closely at what happens and we are going to follow the momentum indicator because if we do have momentum at the top of the range, we are going to hold our position and you can see right here that at the top of the range we still have momentum. Then we follow price action and you can see that here is where momentum spikes. Right here at this point. At this point we can close or trade because momentum is going to start to decay.
When the indicator breaks with the previous low, you can know for sure that momentum is going to start to run down. And remember that with ETFs we want spikes in volume, spikes in momentum. And with this trade, we made 4.2%. So if you have a $5000 account and you invest $4000 in this trade, you will be making $258 while risking only $68.
So this is the first strategy to daytrade ETFs. You look at price action, you find where price action is at, you look for possible breakouts in price action. It can be a triangle, it can be trend lines, it can be a range, and you look for a breakout in the momentum indicator and a spike in momentum to buy.