12 Keys To Success In Trading Leveraged ETFs

by: Doug Eberhardt


What do you do when you are stuck in a trade?

27.6% trading profit in UGAZ for 6/1 - 12/31 and what we learned about ego.

12 Keys to success in trading leveraged ETFs.

What looks good to trade for 2018?

When it comes to trading leveraged ETFs, you have seen me write many articles that harp on the trading rules that one must set up for themselves, before they buy any leveraged ETF. But there comes a time when you will be challenged with your own rules and when the trade goes against you, the battle with your ego takes over. Guess who usually wins? The market of course.

What To Do When Stuck In A Trade

The first thing I want to address in this article is what to do when you get stuck in a trade. I'm going to use UGAZ as an example here as it is one many of us trade. Here are your choices:

1. Sell and take the loss

2. Double down lower or cost average in because you know it will come back.

3. Make excuses why you should stay in. It's freezing in the East Coast. Weather patterns show a cold front coming.

4. Lose so much you finally take the loss, right when it is about ready to move higher in price (happens to many of us).

Which of the four choices above is strategic in nature? The answer is No. 1. But to implement No. 1 above, you have to already have a plan BEFORE making the trade, or shortly there after. When you don't, the other three options enter into the picture.

27.6% Trading Profit In UGAZ for 6/1 - 12/31 and What We Learned About Ego

I have an engineer mind when it comes to trading, and overall use that to make good trades. But a couple times this year I will let my ego get in the way of the strategy I laid out in the trading plan. Almost every time I do that, I end up taking on more of a loss than I wanted. Yes, most of the time I can work myself out of it, but one trade the beginning of December finally put me over the top in once and for all giving me peace as a trader.

I'm constantly working on my trading strategy and when things didn't make sense recently on a UGAZ trade, I had to take a step back or literally scream at myself for not following the rules. I have at times even told traders that when I break the rules ignore me. This is the definition of ego. I don't just write the rules for others, but for myself too. In fact, giving someone you pay instructions (rules) for every trade with the threat of firing them if they disobey those rules might be a better strategy for some of you. At least that person has some fear built in that if they don't follow the rule, the can be out of a job. As a trader though, you're not getting fired from trading. You suffer the loss and you're dumb for doing breaking your rules.

While some traders don't let a loss bother them, some started out with too small of an account and end up letting the trading game defeat them and go about life wondering, "what if?" What if I had just kept that stop. I could have bought UGAZ lower and rode it up the last week of December when UGAZ shot up so much and got some profit out of it quite easily.

I tallied up my profits on calls from June 1st through December 31st and overall had a 27.66% return for the six months. Not bad, but it could have easily been better. You can see all the trades and dates here. Granted I did save some face with a 7.48% call on UNG and 9.5% on 4 DGAZ trades. But I am a perfectionist and just finally hit a wall with stupid trades. Most who have followed me know I admit my mistakes. That's part of winning the battle with your own ego. A little egg on your face brings with it humility and the admission you are not perfect as a trader. No one is. But with trading rules, you can win this game. And of course the most important and hardest is keeping a stop and admitting you were wrong and the market is right - and to use the title of a good movie I saw recently - get out!

12 Keys To Success In Trading Leveraged ETFs

I'm going to let you in on a secret when it comes to trading leveraged ETFs. Three in fact. If you have followed my articles and comments, you may know some of them. My last article had close to 2,500 comments. I have a great group of followers and commenters and you'll learn a lot from this group of traders. Here are the three keys to success in trading leveraged ETFs.

1. Start with smaller shares if new to trading leveraged ETFs. Build to more shares and more risk as your account builds. Then diversify your trades. If you are trading leveraged ETFs, I recommend an account of 25k (preferably 30k) at least because of margin rules for accounts under 25k and your ability to trade in and out. Less than 25k it becomes more difficult to trade and interferes with your decision making.

2. Be patient for the right setup. When sentiment is low is the best opportunity to profit.

3. Keep a stop when wrong (trade your plan before buying an ETF). I have tightened my stops to -2%. Yes, -2%. Never average lower.

4. Add to a winning position (trend is your friend).

5. Move stops up as your profit increases. Sell some shares on big spikes.

6. Sell 1/2 shares when in profit of 2% or more quickly. There will be some runners at times.

7. Once you sell 1/2 shares move stops up to break even. This becomes a no lose trade.

8. Don't follow someone else's call blindly. Look at the darn chart yourself. Read a little about trading and moving averages and RSI, etc. and know that a little homework can go a long way for you.

9. Try a few of the trading services and see what fits you best and who is accurate. Most offer free trials. I purposefully don't have a chat room as it becomes addictive for traders (see #11). I know because I have been in them since 1999. I try to stay away and look at my own analysis first. When I stray, I typically get caught breaking my rules. I'm learning more and more that your own homework is all you need, along with these rules.

10. Leveraged ETFs need to be monitored. If you have to get away and use a limit order on a position, odds are market makers will take the ETF down to it and stop you out. It's like digging for gold. Probably best to sell your position if you can't follow them closely and have to go away for some reason (work or pleasure). If you want to swing trade something, go for the non-leveraged ETFs. Less profit, but gives you more freedom to do your other business if you can't sit and watch the screen or phone to trade the bigger movers.

11. Take breaks for exercise and family. Trading can be addictive. Eat.

12. Don't give up. Always try to improve and learn from your mistakes. The hardest thing to do for you will be to keep a stop. If you don't, it's your one way ticket out and back to your previous life. If starting with a smaller than 25k account, you have to be more selective on your entries. When everyone hates something, that's the time to consider it a buy, but only buy on days when the ETF is positive. Buy into strength and again, keep those stops.

What Looks Good To Trade for 2018?

I'm confident when I say that 2018 will be one of the best years on record for trading leveraged ETFs. We should see some real volatility enter the picture and as much as SVXY was the trade of the year in buying the dips in 2017, along with possibly TQQQ. UVXY should offer some tremendous opportunity for trades in 2018, but only buy if it is up for the day, never down, or if it goes positive and when it matches futures and the Dow being lower collectively for best odds.

Are we still in a bull market? Who cares? As traders, we just want what's moving.

Markets are something to behold the last nine years. Many of the naysayers of the markets you don't see on CNBC any longer, but they'll be back with the same story. And they'll claim they were right all along. As a trader, look at both sides and trade both sides. If you let bias enter the picture, then you'll do well with trades that are with your bias and bad with trades against your bias or not catch those trades at all. I was guilty of this at times in 2017. That's why I put in my trading rules to buy SVXY any day it opens higher for scalps. The same might be said for UVXY this year. Technically, if you are open minded, you can do both though, right? Don't let bias get in your way of profiting.

What will be moving this year are metals and miners. First lower to start January, and then blast off higher. Then one more serious leg down in a deflationary credit contraction move that will be similar to 2009 where everything gets hit, then off to the races. We are short metals with a tight stop in JDST right now. Like to see a move down to 1,220 or below in gold and that would get me long again, somewhere in that range. The dollar should head higher during this time as well as the USD/JPY.

Oil should be fun. We are at $60 a barrel now and head lower for a bit then take off higher.

Natural gas should continue higher but at 3.00 saw some resistance. Baby it's cold outside!

Rates should rise then fall with the deflationary contraction.

What's been beaten down of late? All the trades we got in Friday, DWT, DRIP, YANG, LABD (sold 1/2), UVXY (sold 1/2), JDST.

Hope your 2018 is profitable!

Disclosure: I am/we are long DWT, DRIP, YANG, LABD, JDST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Just because we are long the ETFs listed at the time this article was written, doesn't mean that we are still long a few days later. Red the comment section for current thoughts. We only Trade Leveraged ETFs at Illusions of Wealth because I think they can bring the quickest profit to you as long as you trade with a plan and rules.