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.
- I am a swing trader. So no day trading is involved in this test.
- I run a 100k account for the sake of easy calculations
- My risk/reward ratio is 1:3.5
- 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!