7 essential ETF trading tips for every trader out there

Ever felt excited about starting ETF trading, only to find yourself unsure of the next steps? For many beginners, entering the financial markets is thrilling, but also a bit overwhelming. 

There's a lot to learn when it comes to trading, especially with ETFs. 

However, understanding the basics can make all the difference. That's where this guide comes in. 

Here are 7 essential ETF trading tips tailored for newcomers, offering you the clarity and confidence you need to start strong.

Let’s get into it.

What is ETF trading?

An ETF, or Exchange-Traded Fund, is a type of investment fund that's bought and sold on stock exchanges, similar to individual stocks. They're designed to track the performance of a specific index, sector, commodity, or asset.

Trading ETFs is straightforward. When you decide to buy an ETF, you're purchasing shares of a collective fund, rather than a single company. These shares represent a portion of an entire portfolio. Because ETFs are traded on stock exchanges, they can be bought and sold during regular trading hours, offering flexibility for investors.

What sets ETFs apart is their versatility. Investors can easily diversify their portfolios with a single purchase. Furthermore, they often come with lower fees compared to other investment options. 

This combination of accessibility, diversification, and affordability makes ETF trading an attractive choice for both newcomers and seasoned investors.

7 best ETF trading tips for boosting your portfolio performance

Exploring the world of ETF trading can be complex, especially for those just beginning their investment journey. 

However, with the right strategies in place, you can optimise returns and manage potential risks effectively. 

Here are seven pivotal tips to enhance your ETF trading and elevate your portfolio's performance.

1. Utilise limit orders

When trading ETFs, the importance of recognizing various order types can't be stressed enough. 

Limit orders offer traders a significant advantage by providing a layer of protection against sudden market swings. 

By setting a definite price at which you're willing to buy or sell, you avoid the risk of unfavourable executions due to rapid market changes. 

This ensures you never pay more than you intended or sell for less than desired. 

Furthermore, limit orders can be particularly beneficial in less liquid ETFs where the bid/ask spread can be wider. 

It allows traders to set a boundary, ensuring their trades are executed only within a range they're comfortable with, thus offering a safeguard against unexpected price jumps or drops.

2. Practise a Dollar-Cost Averaging strategy

Investing in the market requires both strategy and discipline. Dollar-cost averaging serves as a beacon for both. Instead of attempting to "time the market" or make lump-sum investments, this method allows you to invest a consistent amount at regular intervals. 

Over time, this can average out the cost of your investment, reducing the impact of market volatility. 

For beginners, especially, this offers a less intimidating entry into the world of trading. 

By committing a fixed portion of your monthly savings, you can build a substantial portfolio over time without the stress of constantly monitoring the market.

3. Navigate market open and close with care

The rhythms of the stock market vary, with opening and closing times often characterised by heightened volatility. 

During these moments, the bid/ask spread, an indicator of liquidity and potential transaction cost, can become inconsistent. 

Unpredictable shifts can result from a myriad of factors: overnight news events, global market influences, or even large institutional trades.

However, recognizing these patterns offers traders a strategic advantage. 

By choosing to delay trade executions until after the initial market rush post-opening or by completing trades well before the market closes, you can potentially find more stable ground. 

Exercising patience and restraint during these periods can lead to more predictable trade outcomes and prevent unnecessary losses stemming from erratic market behaviour.

Check out this informative article: How to open and close a trade in your markets.com account

4. Learn to go with the flow

Exchanges like the NYSE function as auction markets, where buyers propose a bid and sellers offer an asking price. Stocks and funds that frequently trade, because of their visibility and appeal, often possess tighter spreads. This implies that the difference between the buying and selling

However, trading volume doesn't singularly determine an ETF's liquidity. Other factors play pivotal roles.

Market players consistently assess the correlation between an ETF's price and the assets it represents. In instances where discrepancies arise, corrective actions should be swift.

As a trader, recognizing these dynamics and understanding the broader indicators of liquidity can lead to more informed decisions.

5. Capitalising on swing trading

Swing trades are strategies capitalising on notable market fluctuations. Unlike day trades, which are executed and completed within a day, swing trades span a few days to several weeks.

These trades anticipate sizable price movements in assets, be it stocks, currencies, or commodities, providing ample time for the trader's predictions to materialise.

ETFs emerged as a potent instrument for swing trading due to their inherent qualities. They offer diversification, ensuring that risks are spread across a range of assets. Their tight bid/ask spreads further minimise potential costs. Additionally, the broad spectrum of ETFs, representing various sectors and asset classes, empowers beginners. 

With a myriad of options, one can lean into areas of personal expertise or familiarity, strategically choosing ETFs that align with their knowledge base.

6. Be mindful of volatile market environments

Volatile markets are unpredictable and characterised by rapid price swings. Investors, especially those dabbling with ETFs, need to exercise caution. 

Extreme market oscillations can distort the true value of an ETF, resulting in either higher prices (premium) or lower (discount) than the ETF’s net asset value. 

Such deviations can escalate investor costs.

Traders need to remain vigilant during tumultuous market periods. Specific triggers can widen ETF bid/ask spreads, affecting trade outcomes. 

Events such as earnings reports, economic data releases, or announcements from the Federal Reserve can create ripples in the market. 

By keeping an eye on these events and understanding their implications, traders can strategize more effectively, ensuring they aren't caught off-guard by sudden market shifts.

7. Learn the art of short selling through ETFs

Short selling involves selling a security or financial instrument that an investor doesn't currently own, typically borrowed, to buy it back at a lower price. While it presents heightened risks, especially for novices, executing short sells through ETFs is gaining traction due to the inherent safeguards they provide.

Opting to short-sell through ETFs, as opposed to individual stocks, brings down the potential threat of a short squeeze. 

This is a situation where security, heavily shorted, witnesses an unexpected price surge. The associated cost of borrowing for ETFs is also considerably more economical than attempting to short a stock with a substantial short interest. 

The ability to tap into overarching investment trends is another feather in the cap for ETF short sellers. 

For instance, a budding trader, well-versed with shorting's intricacies, aspiring to take a bearish stance on emerging markets, might consider options like the iShares MSCI Emerging Markets ETF (EEM).

While ETFs offer a safer avenue for short selling, new traders should be wary of certain variants. 

Specifically, double-leveraged or triple-leveraged inverse ETFs, which aim to produce double or triple the inverse of a one-day index price movement, embed a considerably higher risk level. 

As such, they might not be the best fit for those just dipping their toes into the complex world of trading.

Final thoughts

ETF trading might appear intricate initially, but with the right strategies and insights, even beginners can shine. Throughout this guide, I've delved deep into seven critical ETF trading tips, each highlighting the nuances and tactics that can set you on the path to success.

ETFs offer a unique blend of accessibility, diversification, and cost-effectiveness, making them a go-to for both seasoned and rookie investors. Embrace their flexibility but remember, diversification is your ally.

From setting limit orders and employing the Dollar-Cost Averaging strategy to keeping a watchful eye during market openings and closings, it's evident that strategy and vigilance are indispensable. Equip yourself with these tools to optimise returns and mitigate potential risks.

The financial markets are ever-evolving. Be it the allure of swing trading, the intricacies of short selling, or the tumult of volatile markets, staying informed and adapting to changes can make a world of difference.

Embarking on your ETF trading journey might feel daunting, but remember, every expert was once a beginner. By internalising these strategies and continually educating yourself, you'll not only survive but thrive in the world of trading.

Interested in kick-starting your ETF trading journey? Markets.com is a renowned CFD ETF trading platform that awaits your exploration. 

Dive into the world of trading by setting up your account today. 

Join now and step into the world of CFDs on prominent global markets.

Hungry for more insights? Continue your learning journey by exploring our comprehensive range of related content, articles, and resources below.

Read the next Article: What is CFD trading? (A full guide with benefits, risks and CFD trading examples)

“When considering exchange-traded funds (ETFs) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.”