Good traders have stop-out points for trades, the point where you’re “wrong.” The aim is to experience a paper-cut. i.e., a minor loss, as opposed to getting your arm chopped off having a trading catastrophe.
A good methodology suggests a clear-cut point where your trade thesis has broken down, you admit you’re wrong and it’s time to move on. Having said that, the market has a certain amount of randomness and “natural vibration.” Some of us at PTL give our trades a little extra “wiggle-room” to account for this. Over time we’ve found this keeps us in trades where we would have normally gotten stopped out, thereby avoiding a loss in exchange for a win where we typically get 2:1 or better on a trade.
Of course, trading records need to prove this is worthwhile so that the periodic extra wins pay for the tradeoff in building in extra room in the trade, and then some. Naturally, there’s no “free lunch.” The tradeoff in doing this takes one of two forms:
To arrive at the wiggle-room amount we start with 10% of the standard daily ATR (dATR). Once we have our basic stop-out point based on the core principle/trading strategies we use, we then add on 10% of the dATR or an adjusted fraction of that. Our rule-of-thumb is that the additional cushion should be no greater than 20-25% of the initial stop-out amount. So if you’ve got a “basic stop” of $0.50 and 10% of the dATR is $0.20, we add on $0.10-0.12 to the trade beyond our core stop, since those amounts are 20-25% of $0.50.
We’ve found this methodology works very well for us and enhances our P&L. To evaluate its potential for what you do, over the course of a month or two, be mindful of the instances when you’re stopped out and determine:
Give it some thought!
Some beginning and intermediate traders have learned chart patterns, gained an understanding of trend, and can create trade setups based on a “reasonable” methodology. But success eludes them because they can’t “put it all together.” A core market principle, a strategy and tactics is only step one. Next is process and execution. You can have all the theory down, but you then need to put it into practice.
In the past decade ETF's have become popular investment vehicles for traders and investors alike. Leveraged ETFs are a type of ETF that track a benchmark or underlying index and use leverage to maximize the performance of the underlying benchmark (typically an index or commodity). They are offered in the form of 2x (ultra) or 3x (pro) leverage and can be either bullish meaning long the underlying asset or inverse, meaning short the underlying asset. For example a popular 3x leveraged crude oil ETF is UWTI. If the price of crude oil goes up 2% the price of UWTI should go up 6%. Some other popular leveraged ETF's include:
Leveraged ETFs allure retail traders with huge daily price swings. Especially inexperienced traders who are looking for investments with big returns to help grow their portfolios. In addition to offering big returns they also offer traders leverage without needing a margin account. It's normal to see these ETF's move 5% or more in a day. Wild daily price swings like these have traders licking their chops and many impulsively jump right into them without fully understanding how they work.
One of the biggest mistakes people make with leveraged ETFs is buying and holding them as long-term investments rather than using them as short term trading vehicles. The intended purpose of these products is to take advantage of daily price movements. Therefore, the appropriate way to use leveraged ETFs is to day trade them. The reason they pose a greater risk when holding for a longer time frame is because every night these funds go through rebalancing where the fund manager has to re-allocate the funds assets to accurately track the underlying index or commodity.
Rebalancing every night causes price decay known as beta slippage. The longer the time they are held for the greater the potential for slippage. To learn more about leveraged ETFs and the math behind slippage check out this video.
Another quality of leveraged ETFs that make them potentially dangerous is that they are often difficult to analyze. Many retail traders don't realize that typical technical analysis and charting doesn't work well on leveraged ETF charts due to the daily rebalancing. Instead you must analyze the chart of the underlying asset.
Leveraged ETFs can be useful for day traders looking to leverage their position without using margin however things like rebalancing are things people need to consider before using these products. In addition, management fees and slippage are two main characteristics of leveraged ETFs that should make them unattractive to long-term investors.
If you do decide to trade these products, it's imperative that you have a thorough understanding of some of the risks that are associated before using them.