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Crude Oil Stocks

This week we saw roughly a 3.25% rally across the board in crude oil prices. The backwardation of the Dec7/Dec8 spread was relatively unchanged to wider for the most part, which continues to tell us the market is no longer willing to pay you to store oil.

Brynne’s 19 Page Analysis

Persistent ‘slight’ backwardation will gently keep max barrels going into storage without meaning the overall market is bullish. Keep an eye on this spread to see if that makes a larger move which would have a more significant bullish/bearish impact.

Read What Brynne thinks this week

Listen to my interview with Brynne at iTunes and please consider leaving a review.

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Michael Martin reads from a recent post on marketing for traders.

He ad libs around key points and discusses how he teaches marketing to traders.

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Trading is a Small Part of It

Please take this post very seriously. The world needs you and your ability to manage money. We have had enough of the rogue managers and CEOs who put on hero trades, stole client funds, and blew up their companies all in the name of their own glory.

Once you’re comfortable with a trading strategy, you need to scale it. That means raising money so that you and your clients can benefit from the value you bring to the trading community. I believe this to be true whether your intention is to go pro or not. Investors need competent help in diversifying and growing their assets. You can be the answer to their question.

You should consider having an asset goal in mind. You can grow your own wealth faster with OPM (Other People’s Money) than just your own. Yes, I know you can start with $10,000 and double your money for 7 years in a row and end up with over $1 million, but that’s not practical to assume that you will grow your capital by 100% for 7 years in a row.

If that’s your goal though, don’t let me dissuade you. However, in my experience most who have tried to double their money in even one year have gone bust. You don’t know if or when the markets that are conducive to your trading style will show up. Consider that an act of randomness. You’ll either trade too big or too frequently and take a big hit or eventually erode your capital.

When I trade, I don’t expect anything to go in my favor. I also make the assumption that I will have bad timing and bad luck, and with that I trade small in establishing a position. If I survive all the things that can go wrong, and I accumulate unrealized gains, I’ll add more to the position. I also defer all judgment on my ability until after I’m out of the position and can do a post mortem on all my actions given what I knew at the time. It’s a very humbling process and I think you can grow from this process regardless of your trading style or methodology. That’s true for system traders, discretionary traders, or systematic chart readers.

Creating Rapport with Allocators

At this point in your career, you need allocators more than they need you…for the most part. Getting their attention is probably not unlike trying to get into a great college or anything you’re targeting for which there is great demand. It’s also not unlike dating…no one is going to give you funds to manage without there being a relationship.

Speaking of which, you’ll be courting allocators for years and years and it will seem like you are doing a great deal of work for no results. It will feel like you are shoveling sand against the tide. This can go on for years. That’s why the spoils most often go to those who can persist, not necessarily those who are the best.


There are thousands of people like you who have read Market Wizards, watched the Trader documentary, and know how to trade. As I mentioned in a previous post, everyone wants money (bullets) to shoot the gun. A trader without assets in a lot of ways is not a trader.

A trader is many ways is like a sniper – someone who is actively managing risk. A sniper is someone who has the rifle and the ammo. In the military, the taxpayers pay for the ammo. Who is going to get your ammo?

Why Allocators Need You

Allocators know that they are likely to get better growth and returns from emerging talent than from PTJ, in all due respect. This is like comparing GE to a new startup that just went public. You know what you’re getting with Tudor Investments. What you bring is capacity and nimbleness.

Asset managers with over $100 billion are beached whales in many ways. There are many instruments that they cannot trade because there isn’t enough market depth or they can not get enough inventory where a 30% move in such would make a difference to their bottom line. So they don’t bother in the first place.

You, the new talent, are a much larger risk. Your ability is unknown and untested. No one knows how you will perform in various market cycles. No one knows your financial staying power, ie, can your “firm” continue operations with a low asset base and low fees? How are you capitalized?

You will be doing all the paperwork instead of going out on date night. It will suck but there is no one else to do it and if you don’t do it, no one will. In a lot of ways, it’s you against the world. How badly do you want it? The best of the best have discipline that you might not have encountered and are currently making sacrifices that can have a huge impact on their professional trajectory.

The payoff of those sacrifices are also unknown in terms of “when” and “how big”, but one thing is for sure: persistence and determination play a huge role in one’s success. We also know that “no sacrifice” on your end means “zero payoff” in the future. You just don’t know when it will pay off or to what magnitude.

Tudor and Caxton probably have 10 people that focus exclusively on RFPs, can speak to Investment Policy Statements, and know all about the appropriateness of managed futures in 501c accounts.

They know how to “hear money” on the phone and all score a 10 out of 10 as far as making in-person presentations. Even worse for you, they show up to pitch in tailored made Loro Piana suits, bespoke Berluti shoes, and the expense accounts to boot. You’ll be ordering water and going dutch to split the bill. Get used to this feeling for a while. It’s ok – I’ve been there. Everyone starts at the bottom.

When you seek money from allocators, you will be going up against the best managers in the world, all with very deep benches, with several decades of track records, and names / brands that instill trust. They have traders who can delineate when bond yields are out of whack and what each basis point in yield represents in terms of risk to the firm, while you’ll be all excited about your trend following breakout system. You’ll need to go a bit more sophisticated than that.

Despite the odds being against you, there are times when the door is left ajar and you can sneak in. You have to be prepared to win though. This is the business where the old expression “Luck is where opportunity meets preparedness” came from. Many of the guys you admire or have read about started out as clerks, runners, or chalk boys.

I’m certain that no one put “chalk boy” on his business card, so don’t feel emasculated by where you are right now. The thing is – these guys had a clear vision of where they wanted to go career-wise and didn’t blink. When you’re in this type of place, you’ll be more than acutely aware of when there is an opportunity for you and you’ll speak up.

I don’t have an elevator pitch. I never did. My approach was always a 2-step process. If I met someone on an elevator, I’d exchange cards and follow up the next day and try to get a low-key meeting on the books. At that meeting I’d only meet for coffee or a breakfast and keep it topical.

Know Who You are Talking to

Pitching someone too soon seemed out of place in the natural order of things from my point of view. Plus, many of my largest accounts when I started out were in Chinatown in Manhattan. If you know anything about the Chinese culture, they spend a great deal of time making a strong base of a relationship with you before they give you any business.

You have to be delicate and extremely patient. If you come on too strong, you come across as unpolished and inexperienced. Even if you’re 40 years old. This flies in the face of ABC “always be closing” type of aggressiveness or were taught the cold calling was the only way to build a business.

I believe the smartest thing Peter Borish and Paul Tudor Jones did when launching Tudor Investments was partner up with Arpad Busson – a private banker who had lots of relationships with wealthy investors. I think they eventually hired him to work at Tudor. If you don’t know where the money is, partner up with someone who does and make sure you overpay them. You’ll need incoming capital for the rest of your trading life. Clients will leave and clients will die. There is churn…and losing your one big client can put you out of business. You need to diversify your book.

An example of this could be you pay them 50% of the annual management fee and incentive fee (as earned). You can also incent them with equity that they earn over a 3-5 year period of time. You both have to feel the burn. It has to hurt both of you. If it’s not enough of a percentage, the fundraiser won’t stay. If the time frame is too short, you’ll only have them for a short period of time before they split.

Align your collective interests for the best potential outcome. And by the way, the equity you offer is cliff-vested. That means 100% of it is earned after the last year of the term of the deal. If they leave beforehand, you retain ownership. The last thing you want is a bunch of equity shareholders who have no further interest in your company. All the shareholders should be committing sweat equity in an ongoing basis. Don’t give the farm away unless they are delivering the city of Manhattan.

Let me give you an example. Would you rather own 70% of a firm that has $200MM in Assets after 10 years or 100% of a firm that manages $20MM in 10 years? It’s a trick question – you might be fine with the latter. It’s as unique to everyone as their fingerprint, but this is what I mean when I say begin with the end in mind.

What kind of firm do you want to run? What do you want your trading to fulfill in your life? What do you want to do with the 6, 7, or 8 figures of annual compensation that you will be garnering.

You have a business plan already, right?

You need to have unbridled passion for what you do and how you do it. You need to understand your place in the world and know what you can do and what you can’t. What you’re willing to do and what you are not. Then, you need to have your ducks in a row. I’m going to help you put your house in order b/c in this stage of your career, like in a lot of things in life, what you don’t know might be putting or keeping you out of business.

“To be loved, be lovable.” – Ovid

Make yourself a lower risk than your peers. Show them that you have your house in order and think ahead of all the things that can go wrong, and have answers for them. Allocators will ask you “What if…” scenarios all day long. I view those questions as “buy signals” so don’t get cute here.

Marketing Plans Are Systematic

Email the TPM / Allocator and let them know what you do. Be bold and brief. If you have more than 4 sentences (that will most likely be read on a smartphone), you will be shot at first sight. Albeit a good read, this is not the time for War & Peace. Your goal here is to get get on the allocator’s radar.

An example of such an email could go like this:

Hi Mr/s. _____,

My name is George and I’m the PM at [firm name]. My talent is in [trading style]. We have [$ Amount] in Assets under management and we’ve been trading for [# years].

Do you invest with emerging managers and how do you evaluate them? I’d like to send you my monthly trade ledger if you do.

**You might be able to find the person on their website. If so, add the next line to the email:

“Who is the best person to send this information to if not you – is it _________?”

Thank you,

Your Name
Email address
Cell #

That’s it.

Do not send a DDOC, marketing material, or an invitation to review your website. Don’t send intro videos.

Don’t send this to 10 people at the same firm at the same time. Send one email, wait 1 week, send to another person. Rinse and repeat. You always want to maintain your dignity and look like a pro.

If they write back and say “Sorry, but No Thank You…”

If they reply “Thanks for your email, but we don’t invest with managers with less than 5 years of track record and less than $50MM in assets,” you can write a two sentence reply:

“Thank you for getting back to me. Most people don’t. Do you know any firms that might make a better fit for where we are? Thank you in advance.” – [Your Name]

Keep track of firms & people, dates, and follow up in a spreadsheet. You don’t need a $200/month CRM to do this.

If “Yes…”

If they say “Sure, you can send them to me,” you now have the first of 500 new relationships that you’ll be on your way to making. Keep moving forward and reach out to 20 new such entities each day. Again, don’t send email attachments and other things they did not ask for.

This will be tempting but you don’t want to become a “Chatty Cathy” after your first beer. Don’t be casual and don’t count on them ever caring or even opening your monthly emails.

Your goal at this point is to spend the better part of the YEAR building your relationships and how to speak with allocators.

Money is Made in How You Follow-up

If they are really interested, they might ask for daily percent changes in your equity for the entire month. This is a good thing. That means, they are asking for the change in your equity in percentage terms from day to day trading your model account. Calculate this each day and have it ready.

The lower the dail vol, the better. In today’s day and age, they are not looking for you to trade some modified Turtle Rule / breakout system that trades 2% risk units and adds up to 8% exposure for one instrument.

That’s basically madness in their eyes. Those days are over and they can get an HFT or algo trader to do that for the pure system style of management. Two, you shouldn’t be risking more that .25% on a trade anyway, but that’s another conversation.

Or they can hire someone with 20-30 years of experience – a sure bet.

I WOULD connect with that person on LinkedIn asap. Why? “Labor migrates,” as it’s said and the person who you just spent 7 months wooing is now at another firm doing the same thing or perhaps enjoying a promotion. Reach out to them and congratulate them and offer to send them a complete summary of your previous dialog.

Be Careful on Twitter and Facebook

You may have very strong political opinions. You may have keen insight on the opposite sex or whatever gender you’re attracted to. Be extremely judicious in what you publish on social media. The people you are going to pitch have strong feelings too and you might end up turning off your intended audience by thinking that you are the White House Chief of Staff or that you are smarter than James Carville. Keep your thoughts to yourself.

What you publish on social media is part of your application process to get an allocation to manage funds.

If you have existing assets, and you are looking to add, you’re going to have a tough time proving to them that taking more than .10 to .25% risk per trade is a good thing. Allocators are looking for low vol from newer managers. Otherwise, there is added risk to your proposition: The risk is that you will fail as a new manager. The risk that you will fail as a new manager taking 100-200 bps risk units per trade is almost guaranteed. Allocators are not looking for managers who can generate 40% drawdowns. They are looking for single-digit, to low teen drawdowns with the potential for 15%+ CAGR.

Allocators already know that if you are a trend follower, for example, and the markets begin to trend you will likely have better returns. However, they also know that when you are a trend follower and such happens, you’ll have greater vol in your returns and in your drawdowns and give-backs. If you want to stand out, you’ll have to find a way to minimize the gains you make that you will give back in reversals. It’s one thing to be in the trade, it’s another to walk away with 75-90% of the move.

Your Trading Style is an Asset Class

Allocators think of you as a potential part of an asset class in a larger asset allocation model that they’re running to diversity their client funds / investments. The allocator will be running hypothetical daily equity runs / tests to see how you fit in with their existing stable of horses if you were to have been hired as a manager.

Does your equity zig when others zag? If you are a swing trader, how does your methodology compare with other swing traders looking at the daily equity changes given your actual trades? Same for any other type of manager or trading style. They may have several managers trading a certain style and if you’re lucky, you might end up as one of them.

It all depends on the risk that the allocator is willing to take and what their mandate is. You see, these allocators might be running pension and defined benefit plans – large retirement plans that are looking for specific exposure to certain asset classes, and/or specific reward to risk ratios given the choice of manager (maybe you). What they’re looking at internally is “can we get another 5 basis points of return by hiring ______ without adding additional risk?” It’s a custom investment frontier.

How to Follow Up with Interested Parties

Do not add this person’s name and email alias to an Email Service Provider or autoresponder such as MailChimp, Constant Contact, or Aweber. You’ll have to email each one manually if you want to come across as professional. You’re not Zappos.

Second, those firms must have an “Unsubscribe” link in the footer section of the email per CANSPAM requirements. Why would you willingly send someone an unsubscribe link when s/he is hard enough to get to a “yes” in the first place?

Although I don’t think anyone has gotten an allocation directly from such, I do think that if you can get some of your original research published in a major publication that will help your reputation.

Speaking at a conference or being on a panel also helps. Admittedly, sometimes you have to “pay to play” and become a sponsor for such speaking engagements and I would do so very judiciously. You can go talk to the Kiwanis or Lion’s Club for free, but that might be good for gathering assets. It’s not likely to move the needle in the eye of an allocator.

On the other end of the spectrum would be SALT, The Milken Institute’s Global Conference, or the Sohn Conference. The obvious catch-22 is that by the time you can afford to sponsor one of these events, the need for your first several allocations has passed and there is less urgency.

However, you can compete for a spot at Sohn for $100 and if you win, get a chance to make a 10-minute presentation at the Conference.

Idea Contest

Know this: the fight for assets in the trading and asset management game is a no-rules street brawl and I’ve seen amazing things happen for the traders that never quit. Hint: They were not always the most talented guys…not by a long shot.

Your success in trading (and in life) will come down to your level of persistence and determination. How badly do you want it? To what extent are you willing to hit your goals?

You have asset gathering goals, right?

Put together a plan and do a little bit each week. Face rejection. You will learn by doing and hearing what the objections are. But if you don’t put a plan together, assets will not walk in the front door…you have to actively go get them.

Furthermore, you don’t have to get registered or take any exams to get started. I know guys who have spent a small fortune getting licensed, renting an office, and building a website and they can’t raise $10,000. Don’t spend money you don’t have.

Do the basics and make it a process that you can replicate week after week.

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By Jason Pearce

Numbers Deception

Mark Twain allegedly said, “Figures don’t lie, but liars figure.”  This can certainly be a true statement when investigating a market’s ROI.

Suppose you find a market that has averaged a positive annual return over the last decade.  Based on this information, does that mean the investor who owned it for the entire ten years made money?

Not necessarily.  It is quite possible he could have lost money on the investment, even though the average annual return was positive.  We’re not even talking about the impact of various account fees, commissions, etc., either.

It is possible for a market to have a positive annual return and simultaneously produce a negative compounded return.  For example, consider a market that gains +20% one year, loses -18% the second year, gains +20% the third year, and then loses -18% the fourth year.

At the end of four years, the average return on this market is a +1% gain.  However, the compounded return on the investment shows a -3.17% loss.

Volatility = Destruction

The higher the market’s volatility, the lower the compound returns.  If the size of the annual changes in the prior example were doubled to show two years with +40% gains and two years with -36% losses, the average return would double to a +2% gain, while the negative compounded return on the investment would increase just over six-fold to a -19.72% loss.

Even if the losses were smaller in proportion to the gains, the higher volatility would still be accompanied by an increase in the damage.  What if the market gained +40% in year one, lost only -30% in year two, gained +40% in year three, and lost –30% in year four?



The good news is that the average return on the market jumped substantially to a +5% gain.

The bad news is that the negative compounded return on the market still increased to a -4% loss.

So even though the average return is five times bigger than the market with two years of +20% gains and two years of -18% losses, the negative compounded return still increased as well.

Also, it does not matter one bit what order those returns are in.  If the market had gained +40% for two consecutive years before experiencing the two -30% losing years, the end result would be the exact same average and compound returns.

Leveraged ETFs

Warren Buffett once said, “Derivatives are financial weapons of mass destruction.”  If we’re talking about ETFs, I am inclined to agree with him.  Especially leveraged ETFs.


Many ETFs are constructed to match the daily returns of an underlying market.  Therefore, they have to be re-balanced every day.  Using the same math as above, if the market gains +25% and then loses -20% the average return is a positive +2.5%, but the compounded return is 0%.  Despite the fact that the percentage gain is larger than the percentage loss, you still would not have any gains to show for it.

But it gets even worse with leverage!

Many ETFs offer leverage that reflect two or even three times the daily returns of an underlying market.  If the underlying market gains +25% and then loses -20%, a double-leveraged ETF would gain +50% and then lose -40%.  As you would expect, the average return is a positive +5%, which is double the average return of the underlying market.

But the compounded return is where you take the hit.  Instead of treading water like the compounded return of the underlying market, the double-leveraged ETF sports a -10% loss.


Triple-leveraged ETFs are like jumping out of the frying pan into the fire.  The results of the triple-leveraged ETF in this same situation would be a gain of +75% and then loss of -60%.  The average return jumps to a positive +7.5% and the compounded return soars to a -30% loss.

How awful is that?  The 3x ETF has an average return that is only 50% bigger than that of the 2x ETF, but the compounded return is three times bigger than that of the 2x ETF.

Real World Examples

Let’s take a look at how an ETF performed vs. its leveraged version.  In particular, we’ll track the most popular ETF on the planet, which is the S&P 500 Index SPDR (SPY).  This ETF simply tracks the S&P 500 Index and uses no leverage.

We are going to look at the returns for 2007 thru 2012 to show the performance during a major bear market and the recovery that followed.

SPY posted a +3.2% gain in 2007, a -38.2% loss in 2008, a +23.4% gain in 2009, a +12.8% gain in 2010, a -0.2% loss in 2011, and +13.4% gain in 2012.

The average annual return over this six-year period was a +2.4% gain.  However, the compounded return was only a +0.5% gain.

When it was all said and done, a Buy and Hold strategy for this ETF would have been basically flat over this six-year timeframe.  Of course, we’re only talking about the money here.  If we take into consideration loss of opportunity, loss of sleep, loss of hair, etc. then the SPY investors probably suffered greatly!

If you think you can handle the heat and want to get double the leverage in the S&P ETF, the “astute” investor could have bought the Ultra S&P 500 Proshares (SSO) instead.  This ETF targets double the daily return of the S&P 500 Index.

SSO posted a -4% loss in 2007, despite the fact that the underlying market posted an annual gain.  There’s the first big red flag right there!  This ETF then posted a -68.2% loss in 2008, a +45.5% gain in 2009, a +25.6% gain in 2010, a -3.4% loss in 2011, and +30% gain in 2012.

The average annual return over this six-year period was a +4.25% gain.  However, the compounded return produced a -30% loss.  This is a much different outcome than the investor who held the non-leveraged ETF experienced.  While his million dollar nest egg was now sitting at $1,005,000, the leveraged investor’s million dollar nest egg has shrunk to $700,000!


So what if the investor had held a bearish double-leveraged ETF instead of a bullish one?  Well, the results would be even worse.

The Ultrashort S&P 500 ProShares (SDS) ETF targets double the inverse of the daily return of the S&P 500.  If the S&P gains 5%, SDS should lose 10%.  If the S&P loses 5%, SDS should gain 10%.  Capisce?

SDS posted a -6.8% loss in 2007, a +30.9% gain in 2008, a -50.5% loss in 2009, a -32.2% loss in 2010, a -18.8% loss in 2011, and -29.8% loss in 2012.

As a result, the average annual return over this six-year period was a -17.8% loss and the compounded return resulted in a devastating -76.7% loss.  You probably shouldn’t even calculate what would have happened to the leveraged investor’s million dollar nest egg with this debacle.

Fool’s Gold

Here’s a recent example for the gold bugs and the commodity investors.  Let’s look at an ETF for gold miners.  This has been a popular one over the last few years.

The Gold Miners ETF (GDX) tracks the NYSE Arca Gold Miners Index and uses no leverage, but that doesn’t mean it’s not volatile.  This ETF posted a -13% loss in 2014, a -25.3% loss in 2015, and +52.4% gain in 2016.

Although the average annual return for GDX during this three-year hold period was a +4.7% gain, the compounded return was a -1% loss.

The triple-leveraged version of this ETF is the Gold Miners Bull 3X Direxion (NUGT).  If you’re looking for trouble, you will certainly find it here!

NUGT posted a -59.2% loss in 2014, a -78.2% loss in 2015, and +57.2% gain in 2016.


The average annual return for NUGT during this three-year hold period was an atrocious -26.7% loss and the compounded return was an unbelievable -86% loss.  That’s certainly a lot more than triple the -1% loss that the GDX unleveraged ETF experienced during the same period.

Using the WMDs

Leveraged ETFs do have their place in a trader’s arsenal.  A trader can amplify their gains in a strong trending market by using leveraged ETFs (provided that he’s on the right side of that trend, of course!)

As a matter of fact, the returns on a leveraged ETF can even overshoot the target returns when a trend is strong enough.

Once a market starts to get a little choppy or breaks trend, though, things go south quickly.  The losses on the leveraged ETFs can accelerate.  Therefore, traders must remain vigilant and be willing to bail out at the drop of a hat.  Leveraged ETFs may not be the ideal instruments for a long-term trader to trade and it’s definitely not the right instruments for an investor to allocate their investment capital to.

Having investigated the dangers of buying them, leveraged ETFs can actually offer a great trading opportunity for the trader who’s willing to follow Robert Frost’s advice and take the road less traveled by.  That path is found on the short side of the trade.


Think about it: if an ETF is going to take it on the chin through leveraged decay and volatility, why shouldn’t a trader take advantage of it by being positioned on the short side?  A lot of the leveraged ETFs reflect the daily percentage change of the underlying market, so it works against the investor over time.  The longer the hold period, the bigger the losses on the ETF.  This works directly in favor of the short seller because he is betting on depreciation in the value of the ETF.


It’s important to understand that a strategy of shorting ETFs is not based on the idea of being bearish on the underlying market.  Rather, it is based on the idea of being bearish on the value of the ETF itself.

Traditionally, if an ETF trader is bullish on a market he would buy the ETF or even some of the leveraged ETFs.  If the trader used the strategy we are discussing, however, he would short the bear ETFs in lieu of buying the bull ETFs.  Conversely, a trader with a bearish opinion of the underlying market would short the bull ETFs instead of entering a long position in the bear ETFs.

Know When to Tap Out

Despite the fact that the short side of a leveraged ETF has extremely favorable probabilities for the trader, it does not mean that it is a risk free trade.  You have to make sure you have position size limits and an exit strategy for the trades that are unprofitable.  Even many casinos still impose limits despite the fact that they have the house advantage.  It’s not done to protect the gambler; it’s to protect the casino!


Even the best fighters know when they should tap out.  This is why they will live to fight another day.  So when you are trading leveraged ETFs, it’s important to know where to tap out.  To that end, I’m going to give you a couple of exit techniques that you may want to investigate to see if they fit your trading strategy.

The first is to set an exit level on a percentage move.  First, you would want to measure the sizes of all the countertrend rallies that have occurred in the last year or so.

If you see consistency in the size of the bounces, say a series of 5%, 4.6%, 4.2%, 5.5%, and 4.8%, you could use the number that is two or three times the average as your exit point.  In this case, the average size bounce is 4.82%.

In the same way that many trend followers use a multiple of a market’s Average True Range (ATR) for an exit signal, a trader could exit a short ETF position if a countertrend rally is some multiple of what the market has been experiencing during the decline.  In the case where the average size bounce is 4.82%, perhaps the exit signal would be triggered by a countertrend rally of 9.6% (double the average) or 14.5% (triple the average).

Another exit technique that a trader could employ would be classic technical tools like moving averages, Bollinger bands, price envelope breakouts, etc.  Simply put, a violation of resistance (preferably on a closing-basis) would tell you that the downtrend is being challenged and that the bears are not in complete control.  If the profits from your short ETF position are no longer “easy money” it’s time to get out and look for better opportunities.

Market Neutral Position

Another idea for traders to consider instead of traditional trend following is to construct a market neutral position.  After all, both the bullish and bearish leveraged ETFs can lose money over the same period.

A trader could construct a market neutral position by allocating half of the capital into a bullish leveraged ETF and the other half into its corresponding bearish leveraged ETF.  That way, the trade is making money on both ETFs if the market stays choppy and trends fall apart.  But even if the underlying market starts to form a strong trend at some point, at least one of the ETFs will continue to erode in value and at least partially offset the other ETF that is increasing in value.

In a market neutral position, a trader could set stops/exit points for the entire position (the bullish and bearish ETFs combined) or the exit criteria could be determined individually for each side of the position.  There is no right or wrong answer here.  Each trader needs to do the research to figure out what is best for their own strategy.

Don’t Tolerate Losers

A trading strategy that focuses on shorting leveraged ETFs can put the odds squarely in favor of the trader.  A majority of trades should work out profitably.  But keep in mind that shorting leveraged ETFs is still not a risk free trade!  It is important that a trader still manage the risk on the trade by setting loss limits.


Given the favorable probabilities of shorting leveraged ETFs, it makes sense that the trader should have even less tolerance for losses from this strategy than that of another strategy where the playing field is level.  If a trade is not working, especially if it’s showing a growing loss, it’s time to cut bait and fish elsewhere.  You’ve got much bigger fish to fry.  The next one should be easier to catch, too.

Editor’s Note: We had access to the institutional database at ETF Global for researching this article.

ETFG offers a 2-week free trial to their research.

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Michael Martin speaks with foreign exchange expert Cornelius Luca in this podcast episode. Topics include European elections and Brexit.

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Cornelius has shared his most recent research with us.

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