Backtesting platform used: AmiBroker.
3 Simple Momentum ETF Trading Strategies
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Momentum Indicator Strategy – Bullish Momentum
We can only provide backtest simulations. Future results will differ. The idea is to reduce risk and get the asset balance right in an attempt to outperform the market, but it is not an exact science. Future returns will be different from the backtested results.
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There are too many variables in the real world. You MUST invest for a period of at least five years to target positive double digit returns. We have three different types of ETF stock trading strategies based on a client's risk profile. Once clients answer a short "risk questionnaire", their "risk score" will be provided. This will give clients some idea of their "tolerance to risk". Figure 2. All the white lines are trendlines for pullbacks. When the trendline is broken it shows selling is continuing and a short position can be taken. Place a stop above the recent high to limit risk, and hold the position until a higher swing high occurs.
This method can also be used in an uptrend. Look for the ETF that is performing the strongest in an uptrend. Draw downward trendlines along the pullbacks, and when the trendline is broken by buying, go long. The following approach is best applied when the momentum indicator day default has recently reached an extreme level, such as or higher, or 90 and lower. Extreme levels on the momentum indicator often signal that the price is over-extended and a turning point may soon be coming. Basing a decision on this alone can be dangerous, though, since prices can keep running for extended periods of time.
Figure 3. As the price falls there is a downward spike in momentum, followed several months later by a higher low.
What is momentum based trading?
This is divergence: the price is making lower lows but momentum is going up. This indicates that there is a potential long trade in the ETF , but the trade needs a trigger and risk controls.
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Once the divergence is set up, a simple trade trigger is to draw a trendline on the momentum indicator and then enter long when the trendline is broken. On this particular trade, the downward trendline following the divergence on the momentum indicator was broken almost exactly at the turning point of a higher price.
Continue to hold the position as long as the ETF price is making higher lows. When a lower low occurs, which can be seen on the far right side of Figure 4. This can also be used as a shorting strategy. Look for a buying spike followed by divergence on the momentum indicator lower highs. Once it occurs, go short when the momentum indicator breaks below the upward trendline. The stop is above the recent high.
While this is often visually seen on the price chart, an RSI indicator can help confirm a range is occurring, and also notify traders when a trending move is beginning.