ETF Trend Trading – Does It Work?

ETFs (exchange-traded funds) are bundles of shares and commodities. The ETFs are mostly traded through fundamental analysis. However, other methods of analysis are also great for technical analysis. So let’s find out if technical analysis works for it too!

Technical analysis is used for trading with ETFs. Through this, investors can find real-time data about how the exchange-traded funds are doing in the market. Utilizing it is essential if you are willing to sell your ETF.

How to tell if an ETF is going to trend?

To tell that ETF will trend, you can use 50-day and 200-day moving averages and get accurate confirmation of forming trends. However, moving averages or RSI, MACD, or other indicators can easily show current trends. For example, if the price is above 50, 100, and 200 moving average or if the price is above RSI 50, we can confirm the rising trend. If more indicators confirm the trend, our confirmation is more accurate.


What ETF to buy in a downward trending market?

You can buy ETF in a downtrend only if you have high fundamental proof for a future bullish reversal. Additionally, it will be nice to see a bullish rising trend on the H4 chart before entering the trade.

This article talks about how technical analysis helps with ETFs and the prominent technical indicators that you can use.

Why do traders use technical analysis with ETFs?

Traders use technical analysis with ETFs to find the best time and price level to enter into trade. So technical analysis is only an additional trigger to enter into trade.

An Exchange-traded fund (ETF) comprises many securities and sticks, and you can implement technical analysis to define the price action for an ETF. 

The technical analysis helps to find the ideal selling and buying points and to inquire about the status of your ETF in the market. Price actions define the sentiments in the market. This approach isn’t always exact wise but is substantial and helps make outstanding judgments. 

Many people object that technical analysis should not be the sole indicator; it should be combined with the other tools and fundamental analysis to avert any future risk.

But that does not mean technical analysis is not very fruitful when used alone because when implemented judiciously, it can bring in significant profits.

If you want to do technical analysis for an ETF, use the compatible indicators. 

Do underlying stocks and ETFs follow the same trends?

Yes, underlying stocks and ETFs follow the same trends because they are designed in the first place to be correlated. However, during the volatile market, we can see minor deviations. Additionally, if we have extensive stocks baskets such as S&P 500, in that case, variations can be much more significant between the basket and particularly stock price.

ETF Trend Trading – Does It Work?

Yes, the ETF trend trading strategy works. If the fundamental analysis shows a potential rising solid trend and the market is already in a bullish trend, you can enter into a trade without waiting for a pullback.

Like stocks, ETFs can be in rising trends weeks and months, so entering into BUY trade even in a solid trend is not a mistake.

The most used technical indicators for ETFs

Technical indicators help draw inferences mathematically and provide good insight into the trading market. In many scenarios, these calculations can be complex, and only under the expertise of experienced technical traders can they be solved. But, at the same time, there are also simple and easy to figure out.

Here are the most renowned indicators that you can use for ETFs.

Moving averages

They are the most precise indicators for ETFs. They show the level of support and tell you about the good chances to buy in the market. 

In essence, this price is termed the mean price for the ETF over time. Traders can find it for any period. You can decrease the price for short-term impact by this.

To establish this moving average, you have to add the stock price from a specific period. Then, divide the aggregate into the total period. For instance, if you are tracking an ETF’s price for seven days, the collection of 7 days has to be divided by 7.

To use it for ETFs, investors will use 50, 100, and 200-day charts and comprehend the moving average for the price they will trade at. If these lines intersect,  it shows bullish action and buying opportunities or bearish action and selling opportunities.

It has been found that most successful trials are made when investors use the 50, or the 200-day moving average for their strategy for technical analysis for their ETF investments.

How can you use 50-day and 200-day lines?

They are used most extensively as moving average lines for technical analysis.

To draw these lines, you have to choose an option from your trading application or program. For example, you can select the ‘strategies’ or ‘indicators’ menu in the trading application and look for moving averages. After clicking, the lines will appear. You can now select your time length for 200 or 50 days. 

You can also create the line manually through accurate calculations. 

If you have an ETF that is traded for more than the price line of 50 or 200 days, there is the indication of a dominant uptrend, and traders can use it to rake in profits. Conversely, if this drops below the line, it shows a downtrend.

RSI and ETFs

RSI is used to measure ETFs’ price momentum. This is done for 14 days or 52 weeks, and the scale has readings from 0 to 100. If the task is below 30, the situation is oversold, while above 70 means overbought. 

If you want to get good profits, your focus should be on ETFs above 70.

You have to follow a 2-step process to calculate the RSI if you are doing it independently. However, the trading platform already has this indicator to save you mental labor.

Chart patterns and ETFs

Chart patterns are used heavily for placing accurate trades. For example, you can use these lines to find the highs and lows on a price chart.

After you have determined the trend line, it will reveal:

  • Pullbacks
  • Support level
  • Resistance labels
  • Trend shifts

Each investor created the trend line uniquely. However, they all have to follow the guidelines while creating their robust strategy for these lines.

Accumulation-distribution indicator

This indicator shows how the traders are trading with ETFs. It has a scale from A to E, which shows what the big investors in the market are interested in. An E rating insinuates that a particular ETF is being sold rapidly.

There is no formula for this rank. But they can find this rating on the broker’s website or trading platform.

A high rating does not depict a rising price. Similarly, less ranking does not mean the price is going down. Hence, this indicator should always be used in combination.

This strategy only applies to liquid ETFs and not to non-liquid securities. 

Trading volume indicator and ETFs

It shows the volume of an ETF traded for a specific period. Some experts say it is not crucial for ETFs, but it certainly helps.

You will find it on your broker’s website or trading platform.

If your ETF has a decreasing trading volume, you will have a wide bid-ask spread. The spread means the difference between the excellent price and the acceptable price of the company. 

Wide bid spreads lead to low profits, so low-volume exchange-traded funds should be traded with utter caution.

Strategies to use technical analysis with ETFs

According to the exchange-traded funds’ database, investors usually experiment with many periods to create trend lines and places of other such indicators. 

Hence, as per this suggestion, you should find the trendline breakouts. That is good for beginners because trend lines are simple and easy to comprehend.

Traders also use complex trend analysis like:

  • Head and shoulders
  • Double taps
  • Wave principle
  • Dow Jones principle
  • Triangles

You can also use the strategies above.

What not to do while using technical analysis for ETFs?

You have to be aware of many things not to lose money in technical analysis. However, the most important thing is to look for the black cross. 

That shows that the 50-day moving average is lower than the 200-day moving average line. Therefore, if this ETF’s price falls beyond this line, the ETF will also be falling. Hence, it would help if you looked for this line first.

Final thoughts

Technical analysis for ETFs is used widely and with more preference by some traders than other analysis methods. However, the market is always risky, but you can improve profits by using this technical analysis. 



Igor has been a trader since 2007. Currently, Igor works for several prop trading companies. He is an expert in financial niche, long-term trading, and weekly technical levels. The primary field of Igor's research is the application of machine learning in algorithmic trading. Education: Computer Engineering and Ph.D. in machine learning. Igor regularly publishes trading-related videos on the Fxigor Youtube channel. To contact Igor write on:

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