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Only triple leveraged ETFs can give you that kind of reward.   Of course, the same goes for the risk in trading these leveraged ETFs.  The rally lasted for a few days for a few reasons

1.  FED said something that I do not even remember.
2.  The CEOs of Bank of American and Citi said they were profitable last month.

I still remember clearly that  Dick Fuld, the CEO of now bankrupted investment bank, Lehman Brothers, said “We are not Bear Sterns and We are in a very good standing”  when the price of their stock stood around 44. 

As I indicated in this post http://www.momdaytrader.com/blog/2009/03/18/stock-market-which-hat-are-you-wearing/,  I was going to swing trade FAZ and SRS.    That is exactly what I did.  Well I did not trade SRS because they move in the same direction and FAZ is more volatile.  All my trader friends on Twitter talked about this and knew that I was going to trade them. You can see all my trading thoughts published here http://twitter.com/trader_mom.   It takes 2 minutes to join us on Twitter and it is totally free. 

Here is the FAZ trade.  Click on the picture to have a better view.

If you have been following my portfolio, you know that I did not take the 10% profit in my last FAZ trade.  Had I taken that profit, I would have ended up with only 10% in this trade too. That is why a trading plan is very important. For readers not familiar with these inverse ETFs,  they go up when the market goes down and vice versa.  They are leveraged short funds.  If I think the market is going down, then I will go long on FAZ, which is equivalent to shorting the market.  Here are my thoughts on the FAZ trade above.

1.  Odds were in my favor since my system had had a bunch of small losers in a row. It was about time to hit something. 
2.  It was a 26k worth position.  If we multiple it by 3(triple leveraged fund), it is 78k. I normally outlay 50-60k for one batch of trades.  So I increased the position size, which I explained in this post http://www.momdaytrader.com/blog/2009/02/02/day-trading-fas-one-shot-one-kill/ 
3.  Here is the most important thing. I was up close to 10% on the same day as I opened it. 3X ETFs rarely gap-down more than 15%. If it had gaped down next day by 15%, I would have lost only 5 %( 1300). My target was 40% or around 10000. 1300:10000 was a very good R/R set-up.  My first stop loss was 10% that would make the R/R ratio 1:4 which was not bad at all. 
4.  The Odds was in my favor and it had a solid risk/reward ratio. I had to pull the trigger.

Tactically speaking, here are 2 things

1. I did not try to catch the bottom as you could see from the chart above. 
2. I would have held onto it for the 40% target if it were not for the weekend.   And because I had a specific target in my mind, I did not prematurely exit it. I moved my stop loss to break even after I was up around 10% and never touched it again until I closed it.

The market has seen a bear market rally lately. I was not able to catch this rally since my system did not generate any signals. I am totally fine with it since it is very hard to catch all the moves.  The question is how much longer this rally will last. I am wearing a bear hat now. My bearish view is strictly pertaining to swing trading. Here is why.

From the start of this bear market that started in Nov. 2007, it has been right to short into every single rally. Why is this rally different than every other? We can not rule out the possibility of mid term reversal. But that kind of probability is quite low until I can see some tangible signs indicated by weekly and monthly charts.

As a successful trader, you and I always choose the path of the least resistance. That path is of course on the bear side because we are in a very big bear market. You should always try to short 70% of the time and long 30%. In other words, follow the trend aka Path of the least resistance. Ok, so we know what the general direction is. Shorting is my strategy.  We need tactics also.

The first is timing. That is I will not short into this rally blindly. I will wait for my indictors to show signs of weakness. Of course we all know technical indicators will be off the mark quite often. But that is OK. I will get out of my short positions as quickly as possible to keep my losers small.  As you could see from my WLT, FAZ and GS, I had 10% paper profits from both FAZ and WLT. I had to close them since I don’t allow such positions turn into losers once they have a 5-7% paper profits before they hit their targets. People who have been following my portfolio for a while know this. GS was a completely loser. It just hit my stop loss.

The second is that I will keep shorting into the rally until my system tells that we are possibly going to see a major reversal. I will not hesitate to short into it just because my first attempt failed.

The third is that I will hold onto my winners once they start to move in my direction.

All these 3 are very important. If any one of these 3 is missing, it will greatly increase my risk.

Which direction do you think SRS and FAZ will give us the best Risk/Reward set-ups?   I will go long on these on any signs of weakness in the general market and my profit target for FAZ will be at least 40% and 30% for SRS.  When they were high up over 100 dollars, I could not short them.   Now I should have no issues going long on them

Click the photos to enlarge them

 FAZ

 SRS

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

It is good to respect risk in trading. However, if you are overly cautious, it is equally detrimental to your trading as you will see from my today’s FAZ trading.

Today, I went long on FAZ the first time. The entry was almost perfect. But I left so much money on the table. Why? I chickened out. Here is the chart. What makes trading hard is that we will have to make almost everything aligned for a successful trade.

1: a good entry.
2: a good exit
3: luck
4: willpower to stick to your plan(emotion control)

It was a text book set-up(a wedge) again. There are just so many patterns to trade. Check out the “Candle Sticks” and “Comprehensive” sections of my libray.

Here is the 5 min chart.

My entry was good, but not perfect. If I had waited a bit more, I would not have bought it on the head of that candle(upper shadow). Since this guy moves big and fast, we really do not have to fuss over a small spread like that. So the entry was very solid.

My exit was horrible. It was beyond the words. After it spiked by 2 percent, I started my trailing stop which took out of my stop. It was like a thief who stole my money and ran faster than anyone. See how big and fast it moved after shaking me out. The reason I started my trailing stop was because I chickened out. It was simple as that.

It was a brutal day for the bulls including me. The market gapped down big because of the following reasons

• Dismal economic data from Japan
• Possible downgrades for various Europe banks
• Possible bankruptcy of the Big 3 auto-makers

Day Trading: Down 1100

Swing Trading: Down 790

I was down around 1000 from shorting our beloved FAZ. My position size was a bit too big. Other than that, there was nothing particularly bad. Of course, I was on the wrong side of the game. The bears ruled all day long today. However, being on the wrong side of the game is very normal. It is just part of the business.

It was not really an easy day for day trading FAZ today. After its huge gap-up, there were not any meaningful moves in either direction. Because I am not good at scalping, I tend to lose in this kind of choppy market. The flip side is that I can catch big fish when it does move.

As for swing trading, my ERX is gone. It hit my stop loss. It was once up nice on paper and now I lost 700+. No big deal. I will try it again later.

Right now, I think I will stand on the sideline for swing trading. So should you. We have officially broken a very solid, multi-week support. If the low holds tomorrow, then we all can put on the bear hat.

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 .

Dow was down 200+ points in the AM and had a dramatic reversal toward the end of the day. The reason was that there are some rumors that the President is working on a plan to subsidize mortgage payments for troubled homeowners. No matter how you look at your charts, you can not predict something like that unless you trade inside information which is totally illegal. There is no need to over-analyze your charts. We react to news which is reflected in price action. We can find out the “why” after the market is closed.

My accuracy today was only 50%. I took 4 trades, 2 tiny losers and 2 big winners. I am up 1200 for the day. Let’s take a look at the first 2 losers. TZA had a ugly chart. I did not realize that after I opened a long position in it, my stop loss was around 3% for both TZA and FAS. When TZA rebounded, I quickly got rid of it since I had realized that the chart was super ugly by then. However, FAZ was fine. So it stayed. Nothing exciting happed to FAZ before the noon. So I closed it with a tiny loss and decided to look for a good entry in the PM. I dislike stocks that keep chopping around. I love movers. Who doesn’t?

After a sweet little nap, I woke up fully re-energized. Nothing was too bad in the AM. I just lost 50ish. FAZ went up big when I was napping. I was thinking that the SRS trade repeated again. It moved without me. How dare you MR. FAZ? It was up close to 17% by then. I was thinking how much more up it could go. So I test shorted 200 shares at the first sign of resistance. And I added 200 more on its way down. I was going to add 800 more to make it 1000 in total. But I pulled back thinking why I need to take the risk. I am already up nice this month. One of my rules is to scale back on a winning streak. So I had a total of 400 shares of FAZ short. It turned out to be a great trade although i left half money on the table. After FAZ started to drop, I was chanting something like “No Fear, No guts No glories” on Twitter. That was all bravado as you can see how quickly I covered. But still I was up 6% on that trade. LOL. See my full daily updates on StockTwits

I opened a swing long in ERX. Let’s see how it plays out. On a side note, I made 6 dollars in HES after 9 days. In fact it hit my standard 15% profit target. So I was up 1500 on paper in HES. But somehow, the order was not executed. One good thing about not looking at my swing account during the market hours is it helps me control my emotions. One bad thing is sometimes the software just malfunctions. My target for leap is 20% minimum.

Since FAZ is a triple leveraged Financial short fund, its daily volatility attracts a lot of market gamblers. I am still trying to get used to trading it. It perfectly fits my day trading profile

• volatility
• superb liquidity.

We need volatility since stocks with volatility move fast and big. We need liquidity since when you need to get rid of it, it can not be like a piece of gum stuck on your shirt. The only con of liquid stocks is that it is hard to trade since there are a lot of professionals trading them. But it is worth your while to practice with all these liquid stocks since one day you might want to scale to a much bigger size once you have full confidence in your system. For example, the market should not have any problem absorbing a single shot of a million dollar position in FAZ. Hopefully you and I will be able to trade positions of that size in the future. That is why I never trade penny stocks or thin stocks. Nor should you.

I only took one trade shorting FAZ today. It was a fine opening trade. Here were some indicators i used

• StockTwits
• Candle sticks + Volume
• Chanting

Let’s go though them one by one.

1. StockTwits is the best indicator. I go there everyday to check out what other traders/investors think. Here is the link http://www.stocktwits.com/t/FAZ. Today I saw there were so many people trying fervently to go long on FAZ. I decided it was about time to fade it. Here is one simple most important reason. A stock goes up only if there is lots of buying power. If most of the buyers are prepared for the pop, that means it is going to die very soon. there are just no one left to push it up. You must think I am kidding….. Go flip through the pages on Stocktwits. You will see how many people there went long on FAZ for various reasons that I would never care.

2. Some people might think my system has some fancy magic indicators. No It does not. I use 2 very simple indicators. They are candle sticks and volume. Of course, it takes a lot of pratice to master them. As you can see from my portfolio, my sentiment is cautiously long. I do not have any short position. That is another reason why I shorted FAZ. Look at the bar where i shorted it. It does not have a tail. Other people like to call them upper shadow and lower shadow. A clean red bar like that means there was no resistance at all from the bulls. Coupled with slightly enlarged volume, it was a go signal. did I know It was sure fire? No. But I thought the odds were in my favor.

3: Right after I placed the trade, i started chanting “FAZ, show me some love”. I did that three times in a row. And it started to drop. Give it a try. It works! LOL……

How my swing positions are doing..

POT, Fantastic Little Runner. I give it 5 stars out of 5. There is nothing bad about. The way it moves is gold.

WLT, Not Too shabby. 4 Starts. Its moves are not as smooth as POT. It chopped a bit. But this stock would shoot up like a rocket if there is some fuel.

HES, Not Too shabby, 4 Starts. Solid oil company that moves at its own pace.

Leap, Nothing fantastic so far, nothing bad. It is just floating with the market. 3 Stars. This stock is like WLT. It is a rocket when it moves. There is nothing I can do to prod it. Maybe I should start chanting my magic words.

STP, what a lazy guy so far!. I do not like how it behaved today. It is perhaps because it went up too much yesterday. 2 starts. It is on probation. If it does not move up in 2 days, it will go to my garbage collectors.

New Member SOHU. I have a small position in it since I have already had quite a few long positions. I have been saying to long Sohu on Twitter for the past 2 days. Talk is cheap. So I am in.