One of the readers asked me why I do not trade leveraged ETFs any more. Did I fail at trading the ETFs? The answer is Yes and No. If you judge it by gains/losses, I did not since I made some money trading the EFTs. If you judge it by my equity curve, I failed since I had so many draw-downs and spikes in the previous months when I focused exclusively on FAZ and SRS.
Draw downs and spikes mean that I am intrinsically taking too much risk. Take a look at my trading in March, I had one big winner(FAZ) and that was all. Without that trade, It would be a losing month. if you have been following my blog, you know how lucky I was with that trade. That big gain does not have much to do with my skills.
Keeping draw-downs to minimum is one of key characteristics of good money management. Big draw downs mean poor risk management. Let’s say if I was down 20% in March and up 30% in April, on the surface it seems Ok since I am still up 10%. But if you look deep into it, it is horrible. I let my risk control slip so that I ended up down a whooping total of 20%. Yes, I was up 30% the next month. Nevertheless If you examine it closely, it is still horrible. Here is perhaps what I did after losing 20% in March. In order to get my money back, I increased my position size and took trades that probably did not have optimal set-ups. And I was lucky and pulled it off. However, if I keep doing this, I am sure I would have two -20% months in a row sometime in the future. Trust me. It is very hard to come back when you are down 40%. I would be just much better off with two consecutive positive months, 5% each.
If you can keep your draw-downs low, it does not matter what kind of vehicles you trade. Some traders can be very good at trading boring bonds or T-Bills and bad with stocks. Some traders can be good at trading E-mini and bad with Forex. It is all normal. For me, I really suck at trading penny stocks. Yet some people are just good at it such as Tim Sykes. It all comes down to choosing the right vehicles.
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