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ETF trading Strategy: What works and what doesn’t?

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Trading in broad-based Indexes like NIFTY 50 and NASDAQ 100 have been a lucrative endeavour for me. I have been swing trading in them for quite some time now and the profits are phenomenal. The reason why I prefer trading in a broad-based Index is because they are the safest instruments for trading available. In this blog post, I will talk about my ETF trading strategy in detail. 

NIFTYBEES trading strategy helps me generate fairly consistent monthly income. Source – My Zerodha Trading Account

Financial Disclaimer

Investing is risky. The information provided here is for general information purpose only. It should not be seen as a professional financial advice. Before investing in equity, always consult your financial advisor, and always risk money that your are willing to lose.

What makes NIFTY 50 relatively safer? 

If you are looking to get some hands-on experience in trading, a broad based index ETF like NIFTYBEES can be a good start. 

NIFTYBEES tracks the performance of top 50 Indian companies across all sectors, and acts as the nation’s economic indicator. Other similar indexes are S&P500 and HANGSENG index. These indexes derive their value from the economic outlook of their respective countries. In the long term, they function as a lagging economic indicator, and in the short term, as a leading indicator. In simple language, the returns on broad index ETFs  like NIFTYBEES  are positively correlated to the economy.  If you know where the economy is headed in the long run, taking a stance on a broad-index is not difficult. 

Betting on Economy 

Betting on the economy is safer than betting on individual stocks. If the economy is too bad, people will get crazy and replace the government in subsequent elections. There is always a pressure on the government to make the economy right, and this is one reason why indexes like NIFTY50 are so safe for the long term. You can hold them for a lifetime if needed and even pass it as an asset to your future generation. It is safer than gold because it’s intrinsic value is backed by economic activity and not wishful thinking. Also, you can use such index ETFs for economic diversification of your portfolio from a long term investment perspective.

Sustained Uptrend

Broad-based indexes that track the economy of a country are  in perpetual uptrend because they reflect the hopes of the nation. The economy doesn’t even need to be good at present for these indexes to react positively. Just a future positive expectation of economic growth is enough to keep this index moving higher. Monetary and Fiscal policies of the central bank and government play an important role here.

My NIFTY trading Strategy 

My trading strategy for the NIFTY50 ETF is very simple. While there are riskier ways to trade in them (like taking intraday positions on leverage or trading derivatives like options and futures), I take the least risky route of delivery-based buying

My strategy is grounded in the philosophy that these indexes will continue to grow in the long run given the consensus projections about the state of the economy. Holding ETFs of such indexes in a demat account eliminates the risk of obligatory selling or buying which is often a case in intraday or forward contract instruments. So there is minimum risk involved from a long term perspective. Short-term downturn resulting from minor market-moving events (like quarterly reports, interest rate changes, Economic news) can lead to ‘unrealised loss’, but you can always wait for the storm to pass without having to take the loss. The downturn can also give you an opportunity to average your position by buying more units at attractive discounts.

Note- If you average your position, your profit target should also be adjusted to sync it with your long term trading strategy. 

Best for beginners 

This strategy is best for beginners who want to practice trading without taking too much risk. Once you start observing the movement of these indices, you will get an idea about the average level of volatility and the pace of trend. Your profit booking strategy will be dependent upon those factors. For example, I always book my profit at 1 to 2 point increase from my average buying price in NIFTY50 because that’s in line with the weekly spread of trading price range. Also, it fits into my long term trading strategy.

Should you time the market?

While it may be tempting to time the market and wait for the index to fall to a desired level before buying, it’s often a futile idea. Timing the market never works for index investing in my opinion. It’s better to buy at the market price and then average your position if the market falls.

Let’s say you buy the ETF at 100 rupee which is a record high level. From there, the index can either break the current price level and move higher or fall down. If it moves higher and reaches your profit target, you can make an exit. If it falls down significantly, you can buy more. This will bring the price of your holding lower. And then you can wait for the index to increase again (which it definitely will if the economic outlook remains positive).

Keeping Emotions at Bay

You need to keep emotions at bay when executing this strategy (and trading in general). If you plan to exit at 2 percent, do it. And do not regret if the index closed 4 percent higher after your exit. The index is not going anywhere and you can again make an entry the next day. It is very important to stick to your long term trading strategy without letting emotions come in the way.

Returns

I have been able to generate on an average 20 to 30 return percent per year through this strategy. I know there are ‘experts’ who claim to generate 100 to 500 Percent return through trading, but I don’t envy them. My trading strategy has minimum risk and limited profit. And I cannot afford to gamble away my capital. 

It might be possible to earn 500 Percent return through strategies like leveraged trades and derivatives, but if something can lead to 500 percent profit, it is equally likely to give 500 percent loss. I will have my peace of mind. Thanks ! 🙂

Leverage is dangerous 

Leverage is a dangerous thing for retail investors. It basically allows you to buy more stock with less money with terms and conditions. If you are new to trading and you want to sleep better, then avoid taking leverage positions. When taking leverage based trade positions, the risk of losing capital increases drastically, and for retail investors, especially new ones, it’s pure gamble.

Bottomline

Delivery based index trading through ETFs is a safe way to put your money to work. If you are new to trading and want to get a feel of how the market works, trading an Index ETF like NiFTy 50 or S&P500 can be a great way to get started. Once you become comfortable in this area, you can move to trading in a more specific sectoral index. I will soon write a blog post about my experience and strategy  in trading sectoral indices like the NIFTY IT index. 

Stay tuned. 

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