Thursday, July 16, 2009

Daytrading leveraged ETF's

Below is a chart of TNA, the 3X Russell 2000 Small Cap ETF. It and its sibling TZA are ideal for intraday trading, especially on a rule-based system like Blue Wave.

The chart above is the 5 minute TNA chart from today's (Thursday's) trading. Note the whipsaws in pre-market, which is why I don't usually trade until 30 minutes after the open. On the above chart, that first trade was the SELL at 7:00 am (PDT). There was one very nice trending trade today, between 11:00 am and 1:00 pm, capturing about a 5% move in TNA.

There were a few minor whipsaws along the way, but none big enough to make a dent in the days profits.

This is what I mean by a whipsaw:

Notice how prices broke down through the stop/reverse dash on the fifth bar above, but quickly recovered to close out the five minute bar still in BUY (BLUE) MODE. I have a few rules that effectively deal with these situations, but still I get caught and whipsawed every so often. The key is that the nice trend trades that last 2 hours, like the trade above, more then compensate for the whipsaws.

This kind of trading also works with less leveraged ETF's, but returns are commensurately lower. Options are just way too inefficient and expensive to trade in this manner, so I save those for longer-term positions.

One doesn't need BW to trade like this, but one does need some rule-based system. I'm experimenting right now with 5 minute 3-Line Break charts that are based simply on the mechanics of those charts. Renko charts are also suitable, using the rules of the charting format for one's rule-based system.

Leveraged ETF's like TNA/TZA/BGU/BGZ have really opened the door to intraday trading apart from traditional S&P Futures and Options. If your system is good enough to average just 1% a day in profits, times 20 trading days a month, times 12 months year (except leap year), well you get the idea.



Mike said...

great post Allan...

did you see how proshares launched a 3x S&P L&S about 3 or 4 weeks ago?

adv is still building on these...

guess they finally caught on that they need to compete in the 3x arena.

anyways...thanks for the intraday analysis.


Anonymous said...

Go figure I discover guidance of this caliber on a blog that merely asks for donations "in the spirit of sharing".

Question: Would I be able to replicate your RENKO/3 line break settings via WWW.STOCKCHARTS.COM ???

Thanks for sharing

Allan said...

Yes, pull up a default Sharp Chart of anything, then switch chart "Type" from Candlesticks to either Three Line Break or Kenko.

Anonymous said...

Great concept! But the market only trends like this maybe less than 30% of the time. And you will have loosing days also. The system could work if you can take 5% some days, scalp the market 1% on most days, while keeping losses less that 1% on days you loose.

It should be possible with a rule-based system and taking no overnight positions. You're on to something exciting. Keep at it!

- cramar

Anonymous said...

Hey Allan,

Thanks for the post. I think the market is going to decline significantly as effectively nothing has changed since the market took a dive earlier this year. The only thing is the stimulus infussion, but I'm not going to debate if and how it has benefited.

I wanted to know your thoughts on the ETF's that short the S&P 500 SPXU, UPRO, SSO, SDS, SH, do you like one over the other, if so which one?


bob said...

Alan you've sold me with your many recent posts. Looked at the BW site and see they offer more than one option. Can you help me out. Do I go after BWI Percision Indicators or BWI precision auto trader and indicators. Thanks for your help and postings. I've learned much.

Allan said...

bob - I use the Blue Wave Trend Indicator which is the signal engine generating the buys and sells you see on my charts. Along with the Trend Indicator, there are a number of tools, called Blue Wave Indicators, that appear at the bottom of the charts and can be used as either stand alone signals, confirmations, filters, or just ignored. They are all included in the price of BWTI.
For an additional charge, there is a BW auto trader and a BW trading room, neither of which I use.

Anonymous said...

Allan, Although I may have been very critical of the Blue Wave Trading Room during my brief time there, I now feel with perfect 20/20 hindsight that I actually learned a great deal about trading with Pro Trader Ed. I can now whole heartedly recommend that anybody wanting to further their skills as a trader, take and pass the acid test, and spend a little time with Pro Trader Ed. Even the most seasoned trader will gain and sharpen skills perhaps dulled by the passage of time, as I did. Ed will teach you that this is a boring monotonous career in which you can make a huge boatload of money if you can simply pass the acid test. Warmest regards from NYC/joe