Among the terms and discussions that a new ETF trader comes in contact with on a regular basis is the ETF trading system. In most cases this is the result of advertising that offers to provide alerts, training, etc. The system is never really explained and most people have an idea of what a trading system is, but not really a solid knowledge of what it is, or why it is important.
Anyone can create a trading system. Most people who become proficient ETF traders develop their own system over the years that is effective and efficient for them. In many cases the terms "trading system" and "trading strategy" get mixed up by people who are not that knowledgeable about ETF trading. The terms do not mean the same thing and this is important to know when looking at advertising.
Without adding the technical jargon that will make your head explode, an ETF trading system is a group of specific rules to determine your entry and exit points for your ETF. Points are sometimes referred to as signals. So, the alerts that a person is getting from their service is the result of lights going off at the entry and exit points after a program has been fed the rules for your particular ETF.
The common analytical tools used to create an effective trading system are not kept behind closed doors either. They are tools like the Moving Averages, Stochastic, Oscillators, Relative Strength, and Bollinger Bands. The information that these tools give you are called "indicators." When at least two indicators are used from one or more of these tools, you have a system.
The next logical question is what indicators are going to make the most effective system. These is where the expertise of long time traders can be very helpful. The indicators that form the effective system are different for different sectors. This is partly due to the fact that they are used for different sectors and different indicators are more relative to specific sectors.
Many people don't have the time or patience to create their own system. This is where the web services come in handy. Most create programs using the indicators most often pulled from the analytical tools. That doesn't mean that they are more effective, but it does give you a head start with a system. The web service creates the rules that fit specific sectors and the user picks the sector and gets the right indicators for that sector.
Other people prefer to do the necessary up front work to create a system that is effective for them and consistently provides them with the gains that they want. The rules for using a system are very simple. First, whether it has been purchased or created, it must make money. Statistically, when a person has ten negative returns in a row they need to re-evaluate their systems and strategies.
Having a plan in place to reduce risk and limit losses is also important when starting a system. Sticking to the buy and sell limits that the analytical tools have indicated are appropriate will take the personalization out of the trading process and allow a safety net from extreme loss. The system must have stable parameters. Some vectors have very hard to identify patterns, you will want to be aware of the kinds of indicators that appear when there is going to be a drastic reverse.
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