Learning ETF Trading Discipline Through An IRA Account

 |  Includes: SPXU, UPRO
by: Jack Holland

For investors who are trigger happy and have the habit of pulling out of winning positions on the ProShares UltraPro Short S&P 500 ETF (NYSEARCA:SPXU), ProShares UltraPro S&P 500 ETF (NYSEARCA:UPRO), or other leveraged ETF positions prior to full appreciation, or of chasing stocks that are sitting on the greener side of the fence at the expense of positions that should have been held until the initial trading goal was reached, trading in an IRA account may be what is needed to help alleviate this money losing behavior.

Day trading is not allowed in IRAs, and most IRA account providers enforce the three-day settlement period between trades, and do not offer margin that could otherwise circumvent this waiting period. Caveat; margin accounts are available through some brokerage houses such as TD Ameritrade, Options Xpress, and Interactive Brokers for the express purpose of circumventing the three-day rule, but this is uncommon.

For the purpose of this essay, I will focus on the IRA account that is not margined. Wellstrade IRAs offered by Wells Fargo for example do not allow margin. Therefore, if the trader is seeking a platform in which to help him learn market discipline, this would be a good choice.

In an IRA account the investor may buy an ETF such as UPRO or SPXU and sell it on the same day, however, if the investor has no additional funds in the account other than what is wrapped up in that particular trade, the three-day waiting game is on.

This may prove psychologically agonizing in a volatile market, especially if the investor is used to moving in and out of positions at the drop of a hat. But on the other hand, it forces the investor to carefully think through each trade and perhaps exercise a better trading plan and investment strategy. I have personally invested in the SPXU and waited out 500-point market swings using this strategy and come out in the black.

What I have also learned from experience is that for any perceived “trade of lifetime” that an investor misses out on any given day of the year, there are another ten just like it coming down the pike, and as long the government regulators do not shut down market speculation, futures, and short-selling, this should hold true from now ‘till eternity.

Understanding what a stock market is and the subtleties of how it really works is the key to overcoming trading anxieties and fears of missing out on the “once in a lifetime” trading event. I have discovered over the past thirty years that “once in a lifetime” trading events actually occur on a fairly regular basis.

Any given market, whether it be a stock market, a cattle market, or the market for typewriters depends on demand, supply, and the perception of value of the good, or commodity being sold and the number of willing buyers and sellers that converge on any given day to turn perception into reality. Add to that man’s ego, or the perception of one being looked upon as a fool for not getting in on a good thing like Mr. Jones always seems to get in on—you know Mr. Jones don’t you, the guy who lives across the street in the bigger house, and drives a faster car, and always seems to have time for golf on Sataurdays. One will then realize that “once in a lifetime” trading opportunities are indeed practically endless.

Add to this mix the fact that Wall Street Barkers and Snake Oil salesmen have dozens of games up their sleeves that make for continued market opportunities, such as the “adjusted” earning's game. Yes, brokers love to let you know that this quarter’s earnings are up based on adjusted expectations even thought that really means earnings are down by 100% from last year. The average American investor only catches the two minute bleep on TV during the evening news that states “earnings exceeded expectations.” This is what I mean by Wall Street Snake Oil. It is all perception. And whether good or bad, the Snake Oil can move the price of a stock faster than reality.

Here is an example of Wall Street Miracle math. Let’s say you have a stock trading at $100 Dollars per share. The market crashes and the stock loses 50% of its value. It is now sitting at $50 per share. What happens if the stock is reported with great fanfare as being up 50% over the following year? Do the math. The stock is now trading at $75 per share, $25 dollars less than the high of $100. Thus 50% going down is not the same as 50% going up. This is simple math, but most investors don’t stop to think about this. And it allows for great “positive” press as a stock that was previously beaten down starts running up again.

The big boys on the Street today are so used to raking in ridiculous profits that the game of propping up stock prices in order to ensure a fast trading ride will continue to be played out at the expense of the uneducated investor who may be scared out of his position when the price collapses the very next day after the earnings announcement.

Trading in an IRA account will allow the investor time to reflect on such realities, especially if the investor has the time to spend between trades in front of the TV set watching CNBC. I encourage all investors to spend at least two weeks watching CNBC from dawn till dusk. By doing so, the bewildering change of posture by the Barkers from day to day in order to explain off the direction or value of the market or of a particular stock will provide invaluable clues as to the underlying psychology of the stock market. And it should hopefully bring the investor to the conclusion that money can be made on any given day of the year, provided patience and a level-headed approach is used.

An IRA could be an investor’s ticket to financial freedom, especially for investors that have a good feel for the markets and are comfortable trading leveraged ETFs. A Roth IRA would be a better choice if the investor believes their trading acumen is good enough to garner huge gains in the market. A Roth IRA also looks better than a regular IRA at this juncture in our history as it appears we may in for a period of much higher taxes to pay down government deficits and the costs associated with the Fed’s monetary policies, i.e., inflation.

Disclosure: I am long SPXU.