Below is my checklist for trading leveraged exchanged traded funds.
The leveraged ETF must trade 25,000 or more shares per day on average.
Only trade leveraged ETFs that are trading at a small premium or at a discount to their net asset value (or NAV). My rule of thumb is to never trade a leveraged ETF with a premium to its net asset value over 1%.
3. Only use charts and technical analysis to trade.
When trading leveraged ETFs, always "trade off the chart," meaning both your entry and exit point should be based on the price action shown on the chart, and stop losses and profit targets should always be used.
Let me repeat: I always have a stop loss order and a good-til-cancelled (or GTC) sell order (my profit target) on every trade.
4. Only use the charts of the ETF's benchmark indices, not the charts of the actual leveraged ETFs.
For example every leveraged ETF has a benchmark index it tracks. Only make a trade when a buy or sell signal is generated from the benchmark index chart.
5. Be very careful of ETNs.
Exchange traded notes are very different then exchange traded funds. In general they are not as “safe” as ETFs, so only use ETNs when there is no other ETF alternative.
6. If there isn't a leveraged ETF available in the market you want to trade, use a regular unleveraged ETF to trade.
Agricultural commodities are an example. Currently there are no leveraged ETFs in this space, so I trade the regular unleveraged ETFs such as PowerShares DB Agriculture
(DBA) and Teucrium Corn
(CORN) if I see a profitable trading opportunity.
7. Only make a trade when there is an absolute clear-cut profitable signal generated from the charts.
This means using mean reversion trading, breakouts from chart patterns, and trading off key support and resistance levels.
Leveraged ETF Checklist in Action
Below is an example of a recent profitable trade I made using my checklist.
Every day I constantly monitor and analyze the charts of at least 25 different markets and Indices looking for profitable trade opportunities where I can use leveraged ETFs.
On July 17, I noticed that on the
of the Philly Semiconductor Index
(^SOX), a 2B Double Bottom had formed. This is a highly profitable pattern that offers both a low risk entry point and a great risk-reward scenario. Therefore a bullish trading signal was generated from the chart of the benchmark index.
Click to enlarge
Thus the only leveraged ETF that tracks the Philly Semiconductor Index from the bullish side is the Direxion Daily Semiconductor BULL 3X ETF
Click to enlarge
Before I purchased SOXL, I had to make sure this leveraged ETF passed all of the requirements from my checklist.
SOXL is very liquid; it trades more than 500,000 shares per day on average, thus passing the No. 1 item on my checklist.
Discount to NAV:
Next I checked to see if SOXL was trading at a premium or discount to its NAV. It was currently trading at a .60% discount to its NAV -- a very good sign since I am purchasing this ETF at a discount to its underlying shares, thus passing item No. 2 on my checklist.
Trading off charts:
Then I checked the chart of the SOXL to get my stop loss for the trade. I used the low of the previous day as my stop loss; that point was $20.42.
I then purchased SOXL at the open on July 18; I used a market order at the open and was filled at $21.28. Therefore my risk on the trade was $0.86, or 4%.
Since I always put a GTC sell order in to lock in my profit target, and I always try and make at least 4x to 5x my money on every trade, I put my GTC sell order in at 16% above my purchase price or $24.68, thereby ensuring that I locked in a 16% profit if the market hit my target price.
Moreover, from my years spent researching and trading leveraged ETFs, I knew that SOXL was a very volatile leveraged ETF. Therefore, if the market moved my way, the profit target would be hit in a very short period -- probably in less than a week.
After I placed the trade, semiconductor stocks rallied furiously and my GTC sell order was filled two days later on July 20 at $24.68, allowing me to lock in a 16% profit in two days.
For more information on which specific leveraged ETFs are the best to trade, backtested and proven highly profitable trading strategies, daily trading ideas based on macro and market news, or money management, please contact Global Investor Monthly.
No positions in stocks mentioned.