Previously, we discussed an ETF strategy using a moving average that is gaining popularity but in my opinion is incomplete. (Click here to read "Beware of Improper Backtesting in ETFs ")
There a number of weaknesses in the strategy but, instead of dwelling upon them, let's look at the way ETF strategies should work.
Today let's briefly look at rule number 1, which states: if a strategy works on one equity ETF, it should work on most if not all equity ETFs.
This means if it works on the SPY, it should work on QQQQ, IWM, EWZ, EWH, and so on. Notice that I say equity ETFs and not all ETFs. The reason being is that commodity, bond, and currency ETFs do trade differently than equity ETFs. But to see if a strategy is valid, look at it over a minimum of 20 liquid ETFs and, if possible, an even larger universe. Good strategies work on most if not all ETFs.
A good example is to look at the TPS strategy published in our book High Probability ETF Trading, now in paperback. What you will see is that the strategy has historically predicted the direction of the 20 more liquid equity ETFs around the world over 90% of the time going back a number of years. That's a terrific success rate. You can also find high probability ETF set-ups each day in my Daily Battle Plan (click here for a free trial).
Again, when looking at a strategy, make sure it works on the majority of equity ETFs. That tells you that you potentially have something special.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.
