Exchange Traded Funds (ETF's)

For new and old investors, the futures market can be quite scary at times. Some of the lot sizes for futures are a bit rich for many, let alone the perceived risk. Now if you’re not too sure what the futures market is and after reading Kevin’s article on page 16, are still not sure that this is something for you, well there is good news here and more on the way.

If you wanted to take advantage of the rising demand for gold, the previous alternatives were limited for many investors. Of course you could spread bet, but that is not for everyone, nor is taking delivery of the metal which does not allow you to buy and sell within seconds rather than days. (That said it is always good to own some gold coins for the long term).

Everyone understands the principle of buying or selling a share, so what better than being able to buy and sell gold, silver and oil and even a currency pairing in exactly the same way and from the same account? The good news is that you can already do this with some of the items listed and it will not to long before a further group will be offered.

HOW THEY WORK

An ETF is basically an index fund that is traded on the stock market. Most funds contain a basket of the asset class (such as stocks) which represent the underlying index. For example the first ever ETF that was released, SPY, tracks the S&P 500 thus contains shares of the stocks listed within the index.

There are a number of different ways of how ETFs are managed, there are Grantor Trusts which mirrored an index when originally created but does not attempt to track it move for move. HOLDRs follow this discipline. There are Management Investment Company’s. which tracks the index closely, although uses a sampling technique rather than buying each of the constituents, these include iShares and sector SPDRs. Then there is a straight forward Index fund that mirrors as closely as possible the index by purchasing all the stocks in the index on a weighted basis and will maintain a close price rating to that index.

If you want to check out how well an EFT correlates to a particular index, you just need to look at the R squared figure, which ranges between 0.00 and 1.00, with 1.00 being perfect correlation and 0.00 being no correlation.

The costs associated with ETFs are relatively small and are laid out clearly. The good thing from an investor’s point of view is that they do not pay these directly, they just buy and sell the fund as they would a stock meaning the only direct costs are brokerage fees.

THE RANGE

There are currently over 200 different ETFs to choose from. You can see a list on sites such as Yahoo or on the TC2005 charting package.

The range includes the main US indices and all sub indices. Individual country selected index funds, sector funds ( you can trade the Consumer Staples fund (VDC) or energy fund (VDE) etc.)

Of particular interest are the newer editions sold as Gold (GLD) which trades at one tenth of the price of gold, the Euro Currency (FXE) which is effectively the euro/dollar pairing and the DB Commodity Index Tracking Fund, DBC, which contains a basket of commodities.

Soon to be released is a Crude oil fund (USO) and Barclays Global are expected to be launching a silver index fund.

TRADING THEM

You can trade in and out of any of these ETFs using a normal stock brokerage account. There is no minimum amount to buy, so you could buy just 5 shares for example.

As with any investment we would suggest you should manage the amount of money you use in any one of these funds. This is particularly important for the more specialized funds such as gold or the new to be released crude oil where there is still a high amount of risk

Regards

Darren Winters

For more information, please visit the following web sites;

www.wininvesting.com and www.wininvestingnew.com

Price verses indicators

Please visit the following web sites for more information;

www.wininvesting.com and www.wininvestingnews.com


One of the very first ‘holy grails’ of trading we encounter is indicators. When we first analyze them whilst looking at past charts, their accuracy looks impressive. But in a live trading environment, are they as useful as they look when we first learnt them with the benefit of perfect 20/20 hindsight?

What a new investor or trader does is to put too much reliance in them, only to find they give false signals. Alternatively, using a number of indicators together produces a situation where some are giving sell signals and others are screaming buy!

Am I therefore saying that indicators are useless? I don’t want to rattle too many feathers here, but it is good to ask questions with regards to the validity of the countless numbers of indicators we use.

All indicators have one thing in common. They use different types of price and volume action in order for them to be compiled. So the next logical question must be; can we simply look at price action as our means to enter and exit our trades?

Whereas many individuals will use indicators to tell them if we are in a strong market, surely price alone can tell us this? To give you an example, take a look at a chart of the Dow. Just looking at the rally in early March, I can see it performed this in the space of 9 traded days. However, the following retracement took 18 days to complete. It’s telling us the bulls have the upper hand as they can push the market up far quicker than the bears can take it back down again.

This type of price action can be viewed on any timeframe, whether it’s a daily, weekly, monthly chart or even an intra-day 5 minute chart. You can also use price bars themselves to give you a good measure of what is happening in the market and identify entry points.

For instance, if price has just broken out of a prior resistance area, I would be more inclined to wait for a pullback before entering the trade. If price pulls back to the area of previous resistance and bounces off it, that gives me a far better area to enter a trade. I can have better placement of my stop/loss and have better certainty that a new support area has been created.

Ok, so using price, whether it is by recognizing patterns, using candlesticks for analyzing opening and closing prices or using simple price reversal signals, we can certainly trade based on that alone.

However, for the number of competent traders I know who do not use indicators, there are others who swear by them.

One trader I know has so many indicators on his screen, it simply looks like one colourful mess of lines on his charts—but the key thing is that it works for him. One indicator he uses is a very short term RSI (2,2) in order to help identify when a pullback is completing on a stock or index that is in a larger uptrend.

Another trader I know likes to use MACD (12,26,9) showing it represented as both a line and histogram. He accompanies this with a stochastic (14,3,3) and combines the two.

Personally, I don’t use these indicators but as we all know, there is no definitive right or wrong way to technically trade. Although I look for price patterns frequently, I personally like to look at how price is moving in relation to key moving averages such as the 50,200 and 500dma. When I see price reacting in certain ways against these averages, it can help give me key buy and sell signals (see past issues).

In summary, you have to find a way of trading that suits you as an individual. The basic way of using indicators may require adapting these days, but they still have their merits if you want to use them to confirm price action.

But the leading indicator of all is price, so recognizing price reversal patterns, consolidations and continuations is essential. Once you have learnt how to spot them, then you need to know how to trade them. Remember, if you are seeing a chart pattern, it’s likely a lot of other traders are too. Because of that, I would
rather wait until after the breakout and inevitable pullback before getting into that
stock……

Regards Darren Winters

The best ways to trade for your pension by Darren Winters

Trading and investing your own pension pot is becoming ever more popular as more people open their own Self Invested Personal Pensions (SIPPs). Before I go any further, I would suggest that you don’t start trading your own pension fund until you feel competent enough to do so.

I remember Derek, the 72 year old who traded his own pension fund from£90,000 up to about £300,000 a few years ago, needless to say, he was happy with what he had achieved. But what should we look to do first of all and what is the best way to maximize our potential?

As a first port of call, ensure you’re using your yearly ISA allowance before you start with a pension. You can invest £7,000 a year into an equity ISA and many providers give you the opportunity to either invest into a wide range of investment trusts, OEICs, individual shares or cash.

If you’re already using your yearly ISA allowance and have a pot of money to put into a pension, then opening a SIPP account is the next step for you. Realistically, you need at least £10,000 to invest into a SIPP as this gives you enough money to negate any dealing expenses you incur and annual charges to still make it worth while.

So what are the benefits of a SIPP? Well a traditional personal or stakeholder pension often just gives you a choice of its own company’s funds or a limited number of funds offered by other fund managers. A SIPP lets you choose from a wide range of funds and other investments. A SIPP is merely a wrapper that provides the tax advantages and legalities for your collection of investments at retirement. You can switch between a large number of funds (typically at least 1000) and permitted investment types.

With a SIPP, you can invest in the following vehicles;

1.
Shares traded on the London Stock Exchange (including AIM); the Dow 30; Nasdaq 100; S&P 500; European top 300.
2.
Investment trusts
3.
Unit trusts (at least 1000)
4.
Covered warrants (such as the Soc
Gen commodity ones we have mentioned in the weekly updates recently)
5.
Commercial property
6.
CFD’s
You really do have a lot of flexibility with what you can place your money into within a SIPP wrapper. The charges are quite competitive too; I spoke to Hargreaves Lansdown who have one of the most competitive SIPPs in the market. They have no set up fee or transfer in fee and no processing fee. They have no dealing fees on unit trusts or OEICs and have large discounts off top performing
funds of up to 5.5%. To trade in and out of individual shares, they charge £9.95 which is also competitive.

The only disadvantage with Hargreaves Lansdown is that they do not currently allow you to trade CFD’s within their SIPP.

However, Killik & Co, one of London’s largest stock brokers will allow CFD’s to be traded within their SIPP plus they have another nice advantage; you can invest into Initial Public offerings (IPO’s) within their SIPP and their stock brokers can keep clients informed of new IPO’s that might be of interest. Their charges are slightly higher than Hargreaves but for larger investors, their service and advice might just have the edge.

Overall, ISA’s will offer more flexibility at retirement as you are free to do whatever you like with your money. It’s therefore essential you and your spouse are using your ISA allowance each year before establishing a SIPP. However if you have a fund you wish to trade, look up the two brokers I have written about.

Remember to correctly asset allocate your fund and take advice on this from these stock brokers if needs be. If you want to trade CFD’s in order to gain the leverage with each stock trade, remember you need to be considered an intermediate investor and have a sufficient funds in order to do this.

You can still trade outside of a SIPP for your pension but once you have used your ISA allowance, this offers the next best tax efficient way to do so.

Regards

Darren Winters
For more information please go to the following websites;

www.wininvesting.com and www.wininvestingnews.com