How To & How Not To Trade Leveraged ETF´s

How To Trade & Invest In Leveraged ETF´s

Leveraged ETF´s are volatile instruments. They are not for the faint hearted. If not used correctly, they can destroy a portfolio quite easily. Here is how you trade them. I believe they are for primarily short term trades and before you trade them, you must know the underlying trend. For example take URTY which is an ETF that seeks daily investment results, before fees and expenses, that correspond to triple (300%) the daily performance of the Russell 2000® Index. Basically speaking this is a very volatile ETF and will more or less track the stock market. For example Let´s say that you are confident of a trend change so you go long the s&p which turns out to be a profitable trade and in the space of three weeks, the market rallies 5%. Just say you used URTY as your trading instrument and to your delight, it has rallied 18% in the same time-frame. Obviously this is an example with a positive outcome and then only reason you made money was because you were right with your trend change. Leverage is a double sided sword and if you were wrong with your trend change decision, you could of lost 18%. Never let this happen.

Always put a hard stop the moment you enter a position. I would say max 10%. You need to have a pretty large stop because of the volatility. Also funds should be at a minimum when you trade with Leveraged ETF´s. As I said earlier, these instruments have the power to blow out your account so use them very wisely and only when you are 100% sure of a trend change. Personally, I think they can be very profitable for short term trading. A trend may be obvious but the market may not go anywhere for weeks, it may just stay consolidating. Here is where you can do well and make at least 3% per trade. Re-enter positions if you get another good entry point (lower than your previous exit). Otherwise leave it go, never chase these instruments, they will blow out your account.

Another thing that medium and Long Term investors need to take into account is the decaying factor of these instruments. Let me give you an example. Just say Silver 2 months ago was $40 per ounce and on the day when it hit $40, AGQ (Silver x 2 Leveraged ETF) was $300 on the stock exchange. As I write, Silver is around the $30 mark but when it reaches $40 per ounce again, AGQ will be around $275 per ounce. Therefore as you can see, this is not an option for buy and hold investors. Holding it for 6 to 15 months is fine but holding it for years is not a good investment option. Also if Silver plummets in price, this will come down hard, mos like more than double the rate of silver´s percentage drop. Use this information wisely and above all control the amounts you invest in these funds.