The swing trading strategy I am going to share with you has produced a 815% return on 48 trades since 2-10-2010. It makes 22.31% on average when it is correct, -3.93% when it is wrong and works 37.5% of the time. I encourage discussion but please read my explanation +before jumping to conclusions. This is a back-tested strategy as you will see. The SPY during this same period returned 140%.
Leveraged ETFs are very useful for day/short term traders as they increase the volatility of the underlying equity.
Most people agree however that they are not suitable for long term investors due to high fees and volatility drag (decay). These are certainly things to think about if you decided to use these instruments.
Volatility drag is the biggest issue as many people point out. For instance if you had 50 days straight of alternating +5% and -5% moves in the etf, at the end of the streak you would be left with 93.9% of your initial money, and a 6% loss is quit manageable. However if during the same streak you had your money in a 3x leveraged etf with +15% and -15% moves, you would be left with only an abysmal 56.6% of your initial cash.
This is because losses work geometrically against you, consider the following
3% loss needs a 3.09% gain to reach breakeven
5% loss needs a 5.26% gain to reach breakeven
10% loss needs a 11.11% gain to reach breakeven
20% loss needs a 25% gain to reach breakeven
25% loss needs a 33.33% gain to reach breakeven
30% loss needs a 42.85% gain to reach breakeven
40% loss needs a 66.66% gain to reach breakeven
50% loss needs a 100% gain to reach breakeven
This is why it is so important to not fall in love with a stock. Even if you are a long term investor have a line in the sand where you will sell. Otherwise you are not compounding your money, you are compounding your losses.
I bring this up to say that a successful leveraged ETF strategy needs to take advantage of the upside possibilities while ruthlessly cutting losses if the trend breaks. The goal is to have an excellent gain to loss ratio of over 3:1. With this a strategy’s break even point is a 25% success rate meaning you can be right only a quarter of the time. The actual strategy has a p/l ratio of 5.67 and a success rate of 37.5% meaning it works extremely well.
The strategy is this:
Create 6 short term daily EMAs, color them red, find the minimum of them
Create 6 longer term daily EMAs color them blue, find their maximum
Enter when the all the reds are first over the blues with a 3% stop loss. Sell when the stop loss is hit or any red EMA crosses below a blue.
That’s it, and you will find this is an excellent way of timing the market and visualizing its trend.
I have created a python back testing program to test different length EMAs, different stop losses, adding a SMA restriction…
You can try it for yourself here: https://repl.it/@RichardMoglenMo/RWB-with-Stop-loss
- Run the program by hitting the green arrow, it will have to download some libraries
- Enter the Ticket Symbol you want to test- I use TQQQ
- Enter the Start date of the test- I use 1/1/2010
- Enter Six Short term red emas- I use 5,6,8,10,12,15
- Enter Six longer term blue emas- I use 30,35,40,45,50,60
- If you want a simple moving average restriction enter a period (So it will only enter if the current price is over that moving average) Otherwise enter 0-I use 0
- Enter a stop loss % I use 3%
- Press enter
My suggestions yield a return of 815% in about 10 years which would turn a 10k initial investment into 91.5k. It also outputs some key statistics such as max gain, max loss and holding periods.
I use this strategy with a portion of my portfolio as it outperforms almost every individual stock pick during uptrends (defined as when the red emas are above blue emas in the index etfs QQQ, SPY)
Submitted March 31, 2020 at 06:53PM by Rmogo21 https://ift.tt/2X5lcts
