Pascal
09-22-2014, 12:28 PM
When short-term trading an equity, the most important point (to me) is the level of the ATR (Average True Range). I use 20 days. Most traders use 14 days ATR. There is not much difference.
Once you determine the ATR, you need to size the envelope around your equity.
For example:I show below the TNA ETF. I use a 5MA envelope whose width must be larger than twice the ATR. Hence, a +/- 3.5% envelope looks good.
When this has been defined, it is always better to Buy on pull-backs down to the lower part of the envelope and short when there is a bounce to the upper part of the envelope. Today, buying TNA would make sense, but the market is too negative. Hence, it is better to short TNA on a bounce to the 5MA or higher. In our case here, we would need to wait for a bounce to $72.
Regarding stop levels, the lowest stop must never be smaller than twice the ATR, otherwise the stops will be hit on a regular base.
Finally, when you trade a leveraged ETF, always prefer trading short. For example, if you want to be long IWM with leverage, you short TZA. If you want to be short, you short TNA. You can see below that the difference between shorting a straight ETF or going long an inversed ETF always favors the Short trade, because these ETFs use options that need to be adjusted overnight. These costs weight on the long ETFs but help the short ETFs.
Pascal
2605426055
Once you determine the ATR, you need to size the envelope around your equity.
For example:I show below the TNA ETF. I use a 5MA envelope whose width must be larger than twice the ATR. Hence, a +/- 3.5% envelope looks good.
When this has been defined, it is always better to Buy on pull-backs down to the lower part of the envelope and short when there is a bounce to the upper part of the envelope. Today, buying TNA would make sense, but the market is too negative. Hence, it is better to short TNA on a bounce to the 5MA or higher. In our case here, we would need to wait for a bounce to $72.
Regarding stop levels, the lowest stop must never be smaller than twice the ATR, otherwise the stops will be hit on a regular base.
Finally, when you trade a leveraged ETF, always prefer trading short. For example, if you want to be long IWM with leverage, you short TZA. If you want to be short, you short TNA. You can see below that the difference between shorting a straight ETF or going long an inversed ETF always favors the Short trade, because these ETFs use options that need to be adjusted overnight. These costs weight on the long ETFs but help the short ETFs.
Pascal
2605426055