The ETF trend following playbook: profiting from trends in bull or bear markets with exchange traded funds

225 Pages·1.63 MB·English

by  Lydon, Tom

The ETF Trend Following Playbook
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The ETF Trend Following Playbook
P T B B
ROFITING FROM RENDS IN ULL OR EAR
M E T F
ARKETS WITH XCHANGE RADED UNDS
T L
OM YDON
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Printed in the United States of America
First Printing August 2009
ISBN-10: 0-13-702901-2
ISBN-13: 978-0-13-702901-3
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Library of Congress Cataloging-in-Publication Data
Lydon, Tom, 1960-
The ETF trend following playbook : profiting from trends in bull or bear markets with
exchange traded funds / Tom Lydon.
p. cm.
Includes bibliographical references.
ISBN-13: 978-0-13-702901-3 (hardback : alk. paper)
ISBN-10: 0-13-702901-2
1. Exchange traded funds. 2. Stock index futures. 3. Investments. I. Title.
HG6043.L928 2010
332.63'27--dc22
2009022712
Thanks to Mom and Dad; my wife, Lisa Ann; our kids, Creagan,
Cameron, and Anya; and Lily, our dog, for their love and support
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Table of Contents
Acknowledgments . . . . . . . . . . . . . . . .xii
About the Author . . . . . . . . . . . . . . . .xiv
Introduction: Buy–and–Hold: Rest in Peace . . .xv
Chapter 1 Trends Are an Investor’s Best Friend . . . . . .1
Buy-and-Hold’s Funeral March . . . . . . . . . . .4
Getting in Touch with Your Emotions . . . . . . .7
Never-Ending Opportunities . . . . . . . . . . . .9
Chapter 2 Risk and Disaster Don’t Have to Go
Hand-in-Hand . . . . . . . . . . . . . . . . . .11
Greed and Fear and Stocks, Oh My! . . . . . . .12
Running Scared . . . . . . . . . . . . . . . . . .13
What Kind of Risk Level Can You Tolerate? . . .14
Types of Risk . . . . . . . . . . . . . . . . . . . .16
Staying Grounded . . . . . . . . . . . . . . . . .17
Is Time on Your Side? . . . . . . . . . . . . . . .17
The Go-Getter (Aggressive) . . . . . . . . .17
The In-Betweener
(Somewhat Less Aggressive) . . . . . . . . .18
The Almost There
(Moderately Conservative) . . . . . . . . . .18
The I’m Outta Here (Conservative) . . . . .18
Chapter 3 Spotting Trends . . . . . . . . . . . . . . . . .23
Tools of the Trade . . . . . . . . . . . . . . . . .23
Learning to Identify Trends . . . . . . . . . . . .24
THE ETF TREND FOLLOWING PLAYBOOK
The Rules of the Game . . . . . . . . . . . . . .25
Understanding the Moving Average . . . . . . . .26
Exiting Safely and Profitably . . . . . . . . . . . .27
Avoiding a Bursting Bubble . . . . . . . . . . . .29
Learning to Live with “the Sell” . . . . . . . . . .29
Finding the Trends . . . . . . . . . . . . . . . . .30
Up, Down, and Flat as a Pancake . . . . . .31
Timing Is Everything . . . . . . . . . . . . . . .35
Chapter 4 Why Trend Following Can’t Be Beat . . . . . .39
Never Look Back . . . . . . . . . . . . . . . . . .42
What Happens After You Sell? . . . . . . . . . .43
Conquer Volatility, Don’t Let It Conquer You . .44
Do You Have Any Better Ideas? . . . . . . . . .44
Buy-and-Hold: Does It Work Like It Should? . .45
Where That Leaves Us . . . . . . . . . . . . . . .46
Chapter 5 The Nuts and Bolts of ETFs . . . . . . . . . .49
Why ETFs Are a Better Solution . . . . . . . . .50
A Fast-Growing Industry . . . . . . . . . .53
Evaluating ETFs . . . . . . . . . . . . . . . . . .54
Employing ETFs . . . . . . . . . . . . . . . . . .56
Chapter 6 Tools You Can Use . . . . . . . . . . . . . . . .61
News . . . . . . . . . . . . . . . . . . . . . . . .61
Analysis . . . . . . . . . . . . . . . . . . . . . . .62
Looking Under the Hood . . . . . . . . . . . . .63
Charting . . . . . . . . . . . . . . . . . . . . . .64
viii
CONTENTS
Chapter 7 Navigating U.S. Markets . . . . . . . . . . . .65
Choices Galore . . . . . . . . . . . . . . . . . . .66
Dow Jones Industrial Average . . . . . . . .67
The S&P 500 . . . . . . . . . . . . . . . . .69
Russell Mid-Cap Index . . . . . . . . . . . .70
The Russell 2000 . . . . . . . . . . . . . . .70
Growth Versus Value . . . . . . . . . . . . . . . .72
Value: Slower but Steadier . . . . . . . . . . . . .72
Trends in Value and Growth . . . . . . . . . . . .73
Domestic Market ETFs . . . . . . . . . . . . . .74
Digging in Even Deeper . . . . . . . . . . . . . .75
Chapter 8 International Opportunities . . . . . . . . . . .77
The Land of the Rising Sun...and Profits . . . . .79
The Beginning of the End . . . . . . . . . . . . .80
Emerging Markets . . . . . . . . . . . . . . . . .82
China’s Dragon . . . . . . . . . . . . . . . .84
Investing in Emerging Economies . . . . . .86
Another BRIC in the Wall . . . . . . . . . .87
International ETFs . . . . . . . . . . . . . . . . .88
Developed Markets . . . . . . . . . . . . . . . .89
Emerging Markets . . . . . . . . . . . . . . . . .90
Chapter 9 The Best-Looking Sector in the Room . . . . .93
Technology: High Highs and Lower Lows . . . .95
The Bubble Springs a Leak . . . . . . . . . . . .96
Passing Around Blame . . . . . . . . . . . . . . .98
One Big Financial Mess . . . . . . . . . . . . . .99
ix