Trading ETFs is challenging. Especially the leveraged ETFs where one $ move in the underlying security becomes a x2 or x3 move.
- While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio.
- Leverage is a double-edged sword meaning it can lead to significant gains, but can also lead to significant losses.
The other thing to consider is because of this they tend to move fast. So trading them should be a short term plan.
I have been trading these ETFs for quite a while now, and have done well by them. They actually fascinate me, so I am getting better at it. My worst ETF trade was on one that actually expired unbeknownst to me. I got in, and it was in profit on day 2. So I kept it, and it started to fall fast, actually against the underlying security. Then it closed and I was left with $0.16 a share. That hurt. Lesson learned: Research them and take a profit so you can trade another day. These are definately NOT long-term investments. Traditional ETFs – sure.
To help me out, this is my overall trading plan:
I use a software called SMT2. Free 30 day trial download so you can check it out.
I run this program after the day’s close. There is a lot to this software, but on a daily basis I look at the summary. Here UGAZ has a pretty good uptrend probability. I will not initiate a trade where the % is below 60%.
I also use this to check on my existing trade. If the % is below 60% I will look at the trade and decide if I should exit.
I head over to INVESTING.COM (I have a subscription to skip the ads and I can create portfolios)
I search for UGAZ:
As you can see, this results conflicts with SMT2 so it is definitely a NO GO. = $$$ saved.
Scrolling down on investing.com I check 2 more things:
Add these factors up and this is a NO GO for sure. In addition I might look at the charts and indicators.
Money management. Since these are short term trades, 1-6 days – I have a profit target at 2-3% of my capital per trade, I do not set it as a limit. I look at it at the end of the day and decide. If it is at, or over 3% I will close. A lot of things can happen overnight. If it is at say 2% AND the indicators are looking good I will keep.
So say you have $10,000 assigned to your L-ETF trading. You should then calculate # of shares and an exit at $2-300. And a hard stop at $100. This all depends on your trading style and risk tolerance.
DO NOT BE GREEDY! If the ETF shoots up before the end of the day, take the profit. Don’t think for a moment you might lose out on a bigger move. Go on to the next.
Free 30 day trial download so you can check it out.