Book Review: High Probability ETF Trading

by: Paul V. Azzopardi

Connors and Alvarez’s book, High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading, is published by The Connors Group and addressed to investors who want to trade their own ETF portfolio.

The book consists of ten chapters and a glossary plus details as to how one can use the support services offered by The Connors Group via the website named after the book. In fact, the book functions as a sort of basic manual for the ETF trading services available, which include software, seminars, and trading courses.

However, the book is stand-alone and can be put to use immediately. How the book is used, and whether one seeks other services, of course depends on how expert the reader is in trading – assistance is there if one needs it.

After the introductory chapter, the reader finds one chapter dedicated to each of the seven strategies. Chapter nine then deals with how best to learn and practice the strategies suggested. Chapter ten puts all the pieces together.

I have been asked to review the book by the publishers and after going through it, I can say that I like the book, think it would be useful, but have some reservations.

I like various aspects. First, the book goes straight to the point, no waffle. There’s no theoretical talk, no splitting of nebulous concepts ad infinitum. All the strategies are explained thoroughly in just 130 pages of rather big type and tables.

Second, the strategies are reduced to clear-cut rules which can be tested.

Third, each of the strategies can go either long or short and each side of each strategy was tested on 20 of the most popular ETFs from inception of the respective ETF to the end of 2008. Summary results of the tests can be found in the book, as well as examples of each strategy. The authors apply the tests to normal ETFs and stay away from leveraged and inverse ETFs. The strategies are not meant to be applied to stocks.

I did not re-test the strategies so I cannot express an opinion on the test results or whether the different strategies actually work. I suggest that readers re-test and evaluate the strategies mentioned before implementing them.

Each strategy uses one main metric and this means that each strategy is relatively simple to execute and can be backtested without complicated programming. This is another thing I like about the book.

One reservation I have is the fact that all the seven strategies rely on mean-reversion; that is, entering on pullbacks, not breakouts. In strongly trending markets the strategies are likely to suffer, or not do as well.

Some assets have a greater tendency to trend than others but all asset prices go through periods of mean-reversion and trending.

A second reservation is that stops are not used in any of the strategies because, according to the authors,

stops tend to hurt the overall performance of most strategies. They tend to whip traders around, stopping out positions that often reverse and turn profitable. They also do nothing to protect you from overnight risk.

The authors instead suggest the use of position sizing and options hedging which they do not explain further in the book but do in the courses.

In all the strategies, exits from positions depend on dynamic indicators, such as moving averages.

A lot has been written elsewhere about stops – whether or not to use them, and what is the appropriate level. I personally always use notional stop loss levels (not automatic ones) combined with position sizing in my trading.

Although I did not backtest, I did study the price graph structures of different ETFs filtered for each strategy set-up. In many instances, prices revert and trigger an exit at an advantageous price. According to the statistics presented in the book, on average, the reversions are profitable and there are more winning trades than losing ones.

One can also devise some simple yet dynamic stop loss mechanisms and apply them to the Connors /Alvarez strategies. This would mean, of course, that the testing statistics in the book would not apply because while some losses would be smaller with the stops than without them, some profits are also likely to be lost. One would have to re-test again.

Overall, I think this is a book worth reading and testing. For the novice, wanting to manage his or her own portfolio, the book and the associated services are likely to be a good starting point. As for professional traders, they are always looking for a new angle and this book provides some useful ideas.