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I am going to have an experiment here to test out automation of trading SRS and FAZ.  I do not know if it works.  It just might. I will open 2 small positions, 5k each in SRS and FAZ.

The set-up is simple.  I am looking for an engulfing bar using the 60 min charts.   The engulfing bar must be big enough to engulf(cover) the last significant red bar. A market order will be sent right after the close of the engulfing bar.   Here is the illustration of the engulfing pattern.   

Here is the Set-Up

• Go long right after the close of the 60 min engulfing bar
• Stop Loss will be 5%. If it gaps down by 10% and it will be considered 2 losers in row. 
• And the risk/reward ratio will be 1:5.   That makes it 5%:25% 

A good outcome will be anything that I do not have 5 losers in a row. The experiment will finish either when one hits the target before sustaining 5 losers in a row or when it loses 5 times in a row. It will start from Monday.  The computer will totally take emotion control out of my hand.  Let’s see how it works. I think it is going to beat me.  The trades will be excluded from my portfolio.   Feel free to ask me questions.

Here are the 60 min charts of SRS and FAZ at the end of 4/17/2008.

Here is the ongoing experiment:  Day 1 Day 2

A lot of people love FAZ because they can make a killing quickly when their bet is right on the target and they hate it because they are killed when their bet is off. It is all attributed to its volatility. Volatility is the nickname of all these triple leveraged ETFs. Analyzing or back testing stocks is the homework I do every night to better myself. I have already passed the stage of losing money due to my solid risk control. But I still need to work very hard to improve my emotional control.

How do I improve my emotional control? If I am very confident in my system, I would never hesitate to pull the trigger when there are signals for an entry.  So let us analyze FAZ. The chart below is the daily chart of FAZ.

Here is the trading plan that we use to run the back test. It is 100% TA driven.

1.  I am a swing trader. So no day trading is involved in this test.
2.  I run a 100k account for the sake of easy calculations
3.  My risk/reward ratio is 1:3.5
4.  Buy major support and short major resistance

For condition 3, my risk/reward ratio normally is 1:3 or 5% : 15% for regular stocks.  But for FAZ, let’s raise it slightly to 1:3.5 due to it is volatility. So percentage wise, it will be 15% : 53%. Why 15? It is because it is a triple leveraged fund. We need to multiple our regular 5% by 3.

Assuming I run a 100k account and I am conformable with a 20k swing position in a regular stock. For FAZ, I need to reduce the position size to 7K per trade because it is triple-leveraged. OK let us trade…..

When the first bottom labeled “1″(a major support) was formed, I took a trade and held onto it until it hit the target, assuming I had been desensitized. As we can see, the 15% stop loss gave me quite some room to wiggle.  It resulted in a successful hit, a 3500 profit. Let’s move on.

When the second bottom labeled “2″(another major support) was formed, I took another trade and held onto it until it hit the target, assuming I had been desensitized again. It gave me another successful hit, a 3500 profit, totaling 7000 after 2 trades.

When the third bottom labeled “3″(another major support) was formed, I took another trade and it was stopped. So I lost 1050. Since the major support was cracked after this trade, I would not touch until another major support is formed.

So I would have totaled 6000 in profits after 3 trades.  Of course I would make 60k if I increased my position size to 70K. And if I had the “courage” to bet 70% of my total stake on such a volatile stock and hold onto it overnight, I would NOT last long in this market.

So from this back testing, we can say that these would be very solid trades if I actually took them. And these trades would be successful only if I religiously followed my plan.  One key element besides “cut the losers and let the winners run” is never second guess your system. That is you need to take all the signals it feeds you.   Would you have a lot more confidence when you have a good understanding of your system?  Random shooting is absolutely a no-no. Let me know what you think.

I did not take any trades in the past 2 days since I was not prepared for the long side. Have a nice long weekend ,everybody!

The stock market had a big rally today. This is actually pretty predictable. I have been talking about shorting FAZ since last Thursday night on Twitter. I mentioned that we might have some opportunities to short FAZ for really fat profits (20-30% in a matter of 2-3 days). Let’s take a look at the daily charts of FAZ

As we can see that it approached the previous high on last Thursday and rose from 40-80 in a matter of a few days . Forget about the fundamentals and forget about that we are a in a big recession. Technical analysis says you do not have good set-ups on the long side of FAZ and your risk-reward-ratio would be totally out of proportion if you do.

 My first attempt to short FAZ was on Friday. I had a relatively big position (50k worth). But it did not hit my target. Percentage wise, it was a small winner compared with today’s. Now let’s take a look at my FAS trade today since FAZ was not shortable. I only took one trade and it was up 26%. You do not see this kind of big day trading movers everyday. How on earth did I have the willpower to hold on it? We will come to that part later. Let’s take a look at the entry. A good entry is half a battle.

For frequent readers of my blog, you know I like this kind of entries very much. That is to short double tops and long double bottoms. Of course, I also like wedges, pennants, flags, and cup-and-handles. My entry was after a W bottom formed at 2. That entry was fine. However, if you entered around 3, that would make your entry perfect since that bottom completed the famous header and shoulder pattern if you include the bottom yesterday, which is 1. If you did not include 1, then bottom 3 and bottom 2 formed a double bottom on today’s chart. No matter how you slice it, there were very strong entry signals.

How on earth could I hold onto it for so long?

Normally, I have 6-7% profit targets for day trades. But it was not the case for this one. I aimed for a much bigger profit. I have been talking about big profits in shorting FAZ since last Thursday night. Why would I barge for a 6-7% gain? How did I cope with my emotions? LOL, I went to nap after I moved my stop loss to break even and when I woke up. Voilà! it was up big nice. It never had meaningful retraces, which made it easy to hold onto it. Had it gone down, I would have been stopped out break-even. That is my stop loss would do its job. It was also attributed to my small position (around 13k). I would have made 10k if my FAS position today was worth 50k like the FAZ trade I took last Friday. But I might not have been able to control my emotions well.

Here is the summary.

1: followed my plan
2: total conviction. When a trade is in motion, I never listen to anyone or anything including any news.
3: a small position.

My only swing long SOHU is doing great. Here is my portfolio and my real time stocktwits

I think following is a strategy to trade all these leveraged ETFs. This strategy is contributed by a trader friend. With his consent, I post it here so others can benefit from it too.

When you’re trading ETFS, find out what the components are and watch those and the news as indicators on your entries and exits. A lot of ETFs are administered by http://www.proshares.com/, it’s easy enough to find which stocks they are comprised of and what % those play. It changes a bit every so often but it’s a really helpful indicator.

If you’re trading SRS, watch SPG in particular but also know that:

Simon Property Group Inc. 6.82%
Public Storage 5.87%
Vornado Realty Trust 4.99%
Annaly Capital Management Inc. 4.90%
Equity Residential 4.64%
HCP Inc. 4.03%

To effectively trade SRS, open two level two boxes, one with SRS the other with SPG. Study the T/S, watch what each do in relation to the other. Open a chart and overlay SRS and SPG. Finally, if your trading platform allows you to follow spreads, create a spread between SRS and SPG and watch those. It takes a day or two of a somewhat intense study, but once you’ve figured out the relationship between the two, you can makes piles of money trading SRS.

The same stands true for FAZ, although it’s not a proshare and it’s harder to find information on it. I’ve watched it for a while and find that following JPM is the most accurate way of understanding what FAZ will do.

Do not swing these and make sure you have tight stop losses in place and honour those stops. I’ve watched SRS move $20 in a day, you really don’t want to be on the losing side of that. It’s much better to lose an opportunity than lose the money.

Of course, you still need to combine this strategy with your risk control and exit strategies .

ALL Triple Leveraged ETFs in order of liquidity are here. Day Traders could not be happier! If I missed any other 3X EFTs, please add them in the comments section.