The ETF Trend Following Playbook | ETF Trends

The ETF Trend Following Playbook

The ETF Trend Following Playbook

by Tom Lydon

Stop getting burned in the markets. Start making solid profits again. There is a way, and it starts with four simple principles:

  1. Know why you’re getting in
  2. Have a strategy for getting out.
  3. Recognize the trends that matter.
  4. Invest based on mathematical realities, not fear, greed or emotion.

Now is the time to take charge of your money.

For decades, the vast majority of us have been very fortunate to enjoy opportunities to improve our personal economic situations. Appreciation in your home, a steady job, growing industry and continual rises in the stock market have been almost taken for granted. But the things investors were once able to bank upon are no longer there. Buying and holding stocks can no longer be counted upon as a sure thing for success.

Our current century hasn’t started off so well, and you and millions of others are being forced to rethink your investment strategies to survive. The markets certainly saw their fair share of volatility before now, but this is different. Times have changed.

The old way is on the way out.

For much of modern investing history, you and countless other investors have heard that buy-and-hold was the way to go. Experts have assured us that, no matter what happens in the markets, they always trend up over time. If you could just hang on and ride it out, you would be duly rewarded with a handsome retirement fund.

Now is the time to take a more active role in your portfolio by following the trends by using a simple strategy that can help protect you on the downside while having you in the markets for potential long-term uptrends.

What can you gain from all this? You will have peace of mind. You will know how to manage your emotions. You will know that you can make money in any kind of market, and avoid those bubbles, booms and busts that have plagued so many other investors. Buy it today!

How Is This Book Different from iMoney?

Tom Lydon’s new book is all about the trend following discipline he uses for his clients and how individual investors can put it to use themselves. Among the topics included in the book are:

  • A discussion of the 200-day moving average and how it’s calculated
  • Why it’s important to shut off your emotions when investing, and some ways for investors to do it
  • Historical examples of major market downturns, showing investors where they could have protected themselves
  • Why trend following is so important in this climate (as opposed to buy-and-hold)
  • Why using ETFs with trend following is so beneficial and how investors can use them with the discipline

iMoney was heavier on ETF 101 and didn’t go into great detail about trend following. We believe that readers of The ETF Trend Following Playbook will find that it’s a good supplement to iMoney.


Read Reviews

“Tom Lydon has been a leader in the ETF business for many years. His new book walks through the basics of ETFs investing, and shows why professionals—and increasingly individuals—are turning to ETFs.” – Bob Pisani, CNBC stocks reporter

“Our complex and global financial system has created a powerful need for guide posts for investors and traders alike. Tom Lydon provides an excellent tool to help navigate the current economic environment in a clear, concise, easy-to-understand way.” – John Jacobs, executive vice president of NASDAQ

“There are hundreds of writers, speakers and advisers clamoring to get a seat aboard the ETF bandwagon. However, if you’re looking for genuine insight from a real pioneer, then read Tom Lydon. Not only is Tom’s ETF Trend Following Playbook a principled how-to guide for individual investors, it is requisite reading for money managers.” – Gary Gordon, editor of

“Tom Lydon has put together a concise handbook for the active ETF trader outlining the key drivers of successful trend investing. [The] ETF Trend Following Playbook provides sound advice for traders as well as a comprehensive and up-to-date tour of all the ETF world has to offer.” – Scott Burns, director of ETF analysis at Morningstar

“Let’s face it, you work too hard for your money to see it disappear before your eyes, especially in these uncertain times. What is certain, however, is that Tom Lydon has done his homework on trend-watching and has written a constructive guide on investing for these times. – review on Bityard


Read Excerpt

Learning to Identify Trends

You may have heard or read about moving averages, or it could be a completely foreign concept to you. Either way, after reading this chapter, you’ll be able to explain the 200-day moving average to everyone you know. You’ll be able to make trades that help you profit and protect your assets. And you’ll be able to impress people at parties. It helps to understand first what the 200-day moving average is all about before you make it the most-used tool in your toolbox. Used by market technicians and analysts throughout the financial industry, this average is based on a mathematical formula that encompasses a 200-day window and determines the mean (the average) price of a security in that period. As the name suggests, the average moves and changes on a daily basis. The end result after 200 days of data is a smooth, sloping line that defines the overall trend.

Moving averages reflect an accurate and precise snapshot of the markets and can trigger buys or sells. The 200-day moving average can slant in one of three directions: up, down, or sideways. But as with everything in life, I must caution that there are no guarantees. How can the moving average help you? It helps to give you a picture of a clear uptrend, thanks to its characteristic smooth line. This can be especially helpful when markets are going herky-jerky.

In those instances, it can be difficult to see the big picture. Instead of giving a snapshot of the sharp day-to-day movements or becoming mired in them, the moving average tells you where things are headed overall. If it’s sloping downward, you know to steer clear. If it’s gradually moving upward, you’re seeing some progress. The moving average allows you to see the forest and the trees.

Buy-and-Hold’s Funeral March

Some of you may be thinking, “What ever happened to the buy-and-hold strategy? It has worked for me for 40 years.” Well, that may be true, but take my word—and the word of many others—for it: It won’t work moving forward. You might want to be sitting down for this: Buy-and-hold is dead. (And there’s no Easter Bunny, either.) Wall Street’s mantra is losing steam and support fast and furiously. Investment pioneers Benjamin Graham, Warren Buffett, and Burton Malkiel spewed the virtues of buy-and-hold for years, but the ugly truth is if you are among the investors who have followed this strategy so far this century, you have lost money.

In fact, Buffett reportedly lost more than $16 billion in 2008, enough to make Graham squirm in his grave. While that figure doesn’t represent the average investor’s losses, it shows just how disastrous buy-and-hold can be.

The bottom line is, buy-and-hold simply hasn’t worked. If you’re already in retirement or are planning retirement, you might be in a terrible situation. The fact that you’ve lost money and that there’s nothing you felt you could have done about it has had a drastically negative effect on your future plans. You might have considered going back to work part-time, or you might have had to call off retirement for now. It’s an ugly scenario for someone to be in, and it’s even uglier when you consider that many people could have avoided it altogether.

The country is in the middle of a major influx of baby boomers who are now moving into retirement, but many of them are finding themselves in the uncomfortable position of having to put off what, just five years ago, was a certainty.

For example, let’s say that you’re a buy-and-hold investor who had planned on retiring in 2009. You’re turning 66, you know that you have the money to do it, and you are ready. But then a crash comes. Now you’ve lost 40% of your portfolio. Suddenly, retirement for you seems as far away as childhood. And when will you have the time to make up the money lost? The closer you are to retirement, the less you can afford to hang on and ride both the ups and downs.

You can find evidence of this by looking at the wheel-spinning the markets have been doing: Had you invested in the S&P 500 in 1997 and held on to it through all the ups and downs until ETF Buy and Holdearly 2009 (and maybe even later), you would be below where you started. All told, that’s more than ten years of investing with little to show for it outside of dividends. And what’s more, you’d be 12 years older. Those of you who are planning for retirement or who are in retirement can tell the rest of you about the pain.

“It’s time to unlearn a common myth about investing,” Jim Cramer told viewers on CNBC in late 2008. “The best way to invest is not to buy a bunch of stocks and just sit on them.” This doesn’t happen often, but I agree wholeheartedly with Cramer. Outside of raging bull markets like the one we experienced in the 1990s, the strategy of buying stocks and holding on to them for eternity no longer works. During bear markets, you stand to lose a whole lot of money, and in sideways markets, your assets will flatline.

But here’s the rub: The term sideways market is somewhat misleading. There’s plenty of market activity, but it’s in the form of a sharp downward move, followed by a sharp upward move. Sideways markets can wear on your emotions. They’re extremely frustrating and, most important, they burn up a lot of time. Have you ever gotten stuck in the snow or mud? The sensation that your wheels are spinning wildly as you dig a deeper and deeper hole is not unlike the feeling some get in markets that are going nowhere fast.

There are a handful of periods in this century where the market has made no money for ten years or more. For example, an investment in stocks that made up the S&P 500 Index during the periods of 1929–1942 (13 years), 1966–1982 (16 years), and 1997–2009 (12 years) would have amounted to no more than a break-even investment.

From 1997 until 2009, the S&P 500 fell in value an average of 0.4% per year. Through the end of 2008, after two devastating market collapses, the S&P 500 returned 7.1% since 1950 and 7.8% since 1980. In 2000–2008, the S&P’s performance was down a dismal 4.7%, including dividends. You don’t have to retrace the past decade or more to see the damage this outdated strategy can cause.

Listen: Life is short. All of us only have so much time to save for our golden years. I don’t know about you, but I certainly don’t have 10 years’ worth of retirement savings to just up and lose—and then slowly but surely make it up until I’m back where I was before, hoping that there’s not another bust before I’m sent back to the starting line again. You and other investors simply cannot afford to suffer the drastic losses we saw in the recent bear markets.

I had never quite heard the strategy of buy-and-hold put this way, but I couldn’t agree more with Mike Macdonald, an investment portfolio consultant with Toronto-based Second Opinion Investor Services:

“Buy-and-hold is a platitude that is outdated. Everything and everybody needs to be monitored regularly because it is often an investor’s life savings and future lifestyle that is at risk. Buy-and-hold is like an airplane’s autopilot. It works great when everything is going smoothly. Then birds fly into an airplane’s engine and the real value of a live pilot is apparent. Unfortunately for investors, most advisors were on autopilot and there was no heroic landing.”