Saturday, August 29, 2015

A study of climbs in inverse leveraged ETFs

I have been toying with the idea of going long reverse leveraged ETFs lately so I put in some hours studying them.

There are a couple different indicators to use for going long. The one I feel most comfortable with is a breakout pattern in combination with higher highs and higher lows. Let's look at the break out pattern first:
So the pattern is some kind of channeled choppiness and a breakout from the top channel. Now the channel doesn't have to be parallel, it could be triangular as well, it is usually upwards sloping but not always. There always has to be a breakout from the top channel.

Let's look at some examples. Here are some upwards sloping trend channel breakouts:

But the breakout can also happen from downwards sloping trend channels and also really steep upwards sloping trend channels:


Here is the breakout pattern visible in a non inverse chart:

In order to get a fuller picture let's look at times when the pattern fails:

This is a clean fail. Could have still been profitable with a loose stop loss level.

This one was downsloping in a severe downtrend. Would have needed stop loss in order to avoid major loss.

Also downtrend, but would have been hard to avoid. A stop loss would have triggered

First one could have been profitable depending on the stop loss level. Second one also but only with a loose stop loss. It would have been easy to loose money on both.

A small profit would have been made right away but would have needed to take a partial at the first top for that. In total a stop loss would have triggered. Unprofitable. 

Guaranteed stop loss trigger

Loose stop loss might have saved this one. Partial profit might have been taken in an early stage. (Unlikely) 

Stop loss trigger. Breakout not clean.

Loose stop loss could save it. Breakout is red.

Stop loss trigger. Partial profit possible.

Stop loss trigger. Severe down trend.

This is an attempt to define a good stop loss level. This should not get stop lossed because the pullbacks are above the start of the pattern.

A clear stop loss trigger.

So in conclusion I haven't decided if this pattern is something I want to play yet. I'll probably analyse climbs in non inverse leveraged ETFs a bit further first.

Sunday, August 23, 2015

Oil and trading rules

Since the last update oil went and shocked the world. I think the turn is close now. Unfortunately I got overcommited. the lesson for me is to just follow my trading rules. They are:

1. At least one of the following criterias must apply.

A, Chart is in a blow off top
B, Chart is in a test of resistance
C, A very strong fundamental case for entry exists

2. Manage bet size. A 3X leveraged chart must be able to withstand 700% from bottom to top.

3. When exiting shorts do not re-enter them when the chart goes back up. See point 1.

4. Tests of resistance should be bet very carefully from low positions.

5. Limit the total number of trades. Really good setups do not come that often.

Can you believe it. I did not follow my own rules. Initially I identified a test of resistance (trading criteria 1 A) but I went in way too heavy early on. I added to positions very soon after the initial position without my trading criterias met for those additional entries. I totally violated rule number 3. 

Even though i had rules I did all this. The problem is that trading takes place under long period of time. Dicipline gets lost during the way. I forgot why I had the rules and I even forgot I had them.

I am thankfull for this hard earned lesson.