SPECIAL REPORT
3 Ways to Increase Your Gains
Trading Leveraged ETF PowerRatings [Author Name]
A Free Report by Larry Connors
[Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]
Larry Connors CEO and Co-Founder
Cesar Alvarez Director of Research
10 Exchange Place, Suite 1800 Jersey City, NJ 07302 (888) 484-8220 ext. 1 www.tradingmarkets.com
Table of Contents
3 WAYS TO INCREASE YOUR GAINS TRADING LEVERAGED ETF POWERRATINGS
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1. ONLY BUY 10-RATED LEVERAGED ETFS
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2. BUY 9-RATED LEVERAGED ETFS - AND LOOK TO SCALE-IN TO 10
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3. SELL LOW-RATED LEVERAGED ETFS SHORT
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4. SCALING-IN, RISK MANAGEMENT AND STAYING DISCIPLINED
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings For many short term traders, leveraged ETFs provide unique access to a wide variety of markets – from the blue-chips of the S&P 500, traded in leveraged funds like the ProShares Ultra S&P 500 ETF ^SSO^ to small caps of ETFs like the Direxion Small Cap Bull 3x Shares ^TNA^.
But of course, what attracts traders to leveraged ETFs is not just the access to different markets – it’s the leverage. And from the 2x exchange-traded funds of Rydex and ProShares to the triple-leveraged ETFs of Direxion, opportunities for short term traders to potentially maximize their gains with less capital are only growing in number.
With this in mind, it is clear that our Leveraged ETF PowerRatings, a simple-to-use leveraged ETF rating system developed by Larry Connors and his team at Connors Research, has arrived right on time.
Leveraged ETF PowerRatings provide short term traders with the tools they need to trade leveraged ETFs in a disciplined, systematic way. Based on analysis and research of a large and growing universe of leveraged ETFs from inception through December 31, 2009, Leveraged ETF PowerRatings
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
may be the only quantified, backtested way for short term traders to find the best leveraged ETFs to trade every day.
The results of this research established that leveraged ETFs can be traded effectively in the short term using PowerRatings. But this same research also helped us learn some of the ways that short term traders can take even greater advantage of the already-powerful edges in PowerRatings. What follows are three of those discoveries. Learn them and see how you may be able to incorporate these strategies into your exchange-traded fund trading with Leveraged ETF PowerRatings.
# 1 Only Buy 10-rated Leveraged ETFs Our highest rated leveraged exchange-traded funds (ETFs), those with Leveraged ETF PowerRatings of 10, have made significant short term gains more than 78% of the time. This is based on thousands of simulated ETF trades in dozens of leveraged ETFs from inception through December 31, 2009.
When you combine this high probability trading accuracy with the fact that the top-rated leveraged ETFs – the ones with Leveraged ETF PowerRatings of 10 – had an average return of more than 3% in five days or less, you can
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
see (1) why Leveraged ETF PowerRatings can be a powerful tool for short term traders and (2) why traders who want to maximize their short term trading look to the “10s” when it comes time to find the best leveraged ETFs to trade every day.
There is a caveat, however. In our testing, there have typically been fewer 10-rated leveraged ETFs than 9- and 8-rated funds. This means that high probability traders who stick exclusively to trading 10-rated leveraged ETFs will likely enter more profitable trades than the trader who trades a greater variety of leveraged ETFs, but they will also have significantly fewer trades over the course of a month or a year.
From a P/L standpoint, there is nothing wrong with this. But traders are human and after a few days without a leveraged ETF earning a top rating of 10, even the most disciplined high probability trader can get a little impatient and start longing to trade – even if the historical edges are not significant, are not on his or her side, or both!
Fortunately, there is a solution for this syndrome. Strategy #2.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
#2 Buy 9-rated Leveraged ETFs – and Look to Scale-In to 10s
Scaling-in strategies are at the heart of high probability trading. In fact, there are some high probability traders who would say that if you are not scalingin to your exchange-traded fund trades - buying more as the market moves lower when you are long and selling more as the market moves higher when you are short – then you aren’t truly making the most of the edges in high probability ETF trading, including high probability ETF trading with Leveraged ETF PowerRatings.
Why? Because research in well-documented in books like Short Term Trading Strategies That Work and High Probability ETF Trading, Larry Connors and Cesar Alvarez have shown that, in the short term, strategies based on buying markets after they have moved lower outperform strategies based on buying markets after they have moved higher. While this may seem commonsensical to some, the fact remains that the vast majority of short term traders are still in the “buy high, sell higher” camp of buying markets after they have moved higher.
This research has not only shown that buying markets, including leveraged ETF markets – after they have moved lower – outperforms buying markets
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
after they have moved higher. The research also revealed that the more the market has moved lower, the more likely that market is to rally back strongly.
In other words, a market that moves down by a point or two should not necessarily be expected to rally strongly in the short term. But a market that dives down by 10% or more, according to our research, is a market that has historically advanced – and by significant margins – in the short term.
How do high probability traders take advantage of this? By buying additional shares of the market when the market pulls back even further. For Leveraged ETF PowerRatings traders, this means buying a first unit or partial position when a leveraged ETF earns a 9, and buying a second unit or partial position if that fund is upgraded to a 10 at any time while you are still in the trade.
Let’s take a look at a few examples: On January 22nd, the Direxion Financial Bull 3x Shares ^FAS^ earned a Leveraged ETF PowerRating of 9. The closing price of FAS was 70.29.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
A few days later, FAS earned a PowerRatings upgrade to 10. On this date, January 26th, FAS closed at 67.91.
At this point, the average cost of the trade – assuming equally weighted positions – is 69.10.
Within days, FAS had moved significantly higher. The fund closed above its 5-day moving average on January 27th at 72.16 for a gain of more than 4%. By the time FAS lost its top rating (7 or lower), the fund had gained 4.8%.
The early part of this year featured a number of examples of how traders can use scaling-in strategies to potentially enhance returns in Leveraged ETF PowerRatings trades.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
Here’s another example. On January 22nd, the ProShares Ultra S&P 500 ETF ^SSO^ earned a Leveraged ETF PowerRatings upgrade to 9 (closing price 36.66). A few days later, SSO earned an upgrade to 10 on a close of 36.17. What’s more, the next day, SSO earned a second straight 10 rating, with the closing price dropping to 35.37.
At this point, the average price is 36.07. Again, we assume equally weighted partial positions or units.
In just one day, this trade was up more than 1%, as the SSO closed above its 5-day moving average. By the time SSO lost its top rating (again, dropped to 7 or lower) a day later, this hypothetical SSO trade was up by more than 3%.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
#3 Sell Low-Rated Leveraged ETFs Short Would you believe that there is an edge in Leveraged ETF PowerRatings that is even more powerful than the one the research showed in 10-rated funds?
The same data that showed that 10-rated leveraged ETFs tended to make significant short term gains more than 78% of the time also revealed that ETFs on the opposite end of the scale, those with Leveraged ETF PowerRatings of 1, were only profitable 19% of the time.
Why is this potentially a more powerful edge than the one we see in 10-rated ETFs?
Because a leveraged ETF that makes short term gains only 19% of the time is an ETF that potentially can be sold short correctly more than 80% of the time.
Consider the example of the ProShares UltraShort Oil & Gas ETF ^DUG^. DUG closed with a Leveraged ETF PowerRating of 1 on March 25.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
With an extremely low Leveraged ETF PowerRatings and a closing price of 12.90, DUG took only one more day before reversing back to the downside. Closing below its 5-day moving average (and earning a PowerRatings upgrade out of the “consider avoiding” zone of 1s, 2s and 3s), DUG gained just shy of 4% in a matter of days.
What’s more, the same scale-in strategies that work with 9- and 10-rated leveraged ETFs also works with the lowest rated leveraged ETFs, those with PowerRatings of 1 or 2.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
Above is an example of a short trade in which an initial position was taken when the ETF had earned a PowerRatings downgrade to 2, and an additional position taken when the ETF earned a further downgrade to 1.
Here, the ProShares Ultra Gold ETF ^GLL^ closed with a Leveraged ETF PowerRating of 2 on January 21st. The closing price was 10.24.
One day later, GLL closed higher still at 10.27, earning a Leveraged ETF PowerRatings downgrade to 1 – our lowest possible rating.
At this point, the average price is approximately 10.26 (10.255). GLL rallied to close below its 5-day moving average on the first day of February, closing at 10.02 for a gain of more than 2%.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
Interestingly, traders who took a more aggressive tack could have added additional units when GLL closed with a Leveraged ETF PowerRating of 1 again on the 27th and the 28th. This would have increased the cost basis from 10.26 to 10.33 and the potential gains to more than 3%.
Scaling-In, Risk Management and Staying Disciplined
Leveraged ETFs are not for trading novices. The potential for sizable gains through trading leveraged ETFs is very real – but so is the potential for loss. Because of this, short term traders should make sure that they are careful not to take on more risk than their portfolio risk tolerance can handle. One general rule of thumb is to use half your regular trading size when trading 2x leveraged ETFs, and even less when trading 3x leveraged ETFs.
Another point of caution: no trading strategy, regardless of how effective, will work as it has historically if the trader using that strategy does not stay disciplined, taking the right trades when they appear (buying 9s and 10s and avoiding or selling short 2s and 1s), and exiting those trades at the right time. Two of the biggest mistakes short term traders can make are (1) not taking trades when the edges are on your side and (2) staying in trades too long, letting gains potentially become losses.
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
All that said, these techniques, the “science of scaling-in”, is one of the more important contributions that Connors Research has brought to the field of short term trading in exchange-traded funds. Along with the 2-period RSI and the importance of short-term volatility, the science of scaling-in to high probability trades can make a major difference in the bottom line results for short term traders who learn and embrace these strategies.
To Start Using These Strategies, Please Click Here: Get Your Free 7-day Pass to Leveraged ETF PowerRatings
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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings
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