Swing Trading and Day Trading ETFs – Large Position Sizes Are Not Absolutely Necessary

Contrary to popular belief you don’t need to trade big share sizes to make a decent amount of money in the market.

In addition to trading for a living, I manage subscription based educational service called the Swing Trade Playbook. The idea behind the Playbook and this blog is to educate individuals about ETFs, trading, swing trading and day trading.

Every weekday night my Swing Trade Playbook outlines my trading plan for the next trading day. By doing this, I allow individuals to “peek over my shoulder” and see tomorrows trading plan today!

Today’s lesson, you don’t need to trade large size to earn a good living swing trading. The image below shows the positions my Swing Trade Playbook shared with subscribers about one week ago. As you can see the largest position is only 1,136 shares and if you were to enter the positions your unrealized P&L would be pretty close to $21,000 with an initial risk of approximately $7,000 (a 3 to 1 reward to risk ratio).

I wanted to show this since a potential subscriber emailed and asked how I can make any money trading small share sizes.

If you would like to learn more about my Swing Trade Playbook go to my website http://etfupdater.com/examples.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com

Best & Worst ETFs

Best Performing ETFs for Friday December 14, 2007

Energy, specifically clean energy and Commodities (Gold) were the only two sector ETFs I track that were positive on the day.

PBW PwrShr WilderHill Clean Energy 1.55%
GLD StreetTRACKS Gold Trust 0.15%

Worst Performing ETFs for Friday December 14, 2007

It seems the heavy selling was in the Real estate and Banking ETFs.

KBE SPDR Series KBW Bank -4.45%
ICF iShares Cohen & Steers Rlty Ma -3.62%
RWX SPDR DJ Wilshire Intl Real Est -3.43%
RWR SPDR DJ Wilshire REIT -2.93%
VNQ Vanguard REIT ETF -2.89%

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com

ETF Swing Trading – Good or Bad? Depends Which Side of the Market You’re On!

The ETF Sector Rotation Strategy (our strategy for longer term investors) lost ground today, but the positions are still in positive territory.

The Swing Trading Playbook has been hitting it out of the park all week. We had very few trading signals since the positions entered earlier in the week are working great. The Playbook is up about 4.5% for the week and holding a few unrealized gains over the weekend and into next week.

It looks like Monday may be the time to hedge the portfolio or start ringing the register on few positions.

Here is a screen shot of the open positions for the Swing Trade Playbook. As you can see, huge positions are not necessary to make money swing trading. The key this week was keeping the losses small and letting the winners run.

To learn more about how you can benefit from us visit http://etfupdater.com/.

Have a good weekend!

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com/

Investor Sentiment

Investor Sentiment is important for traders when determining a directional bias for their swing trades. Remember, swing trading consists of trades generally last more than a day and can continue for a few weeks if the trader’s bias remains constant.

It is even quite common for institutional traders to use the bias generated from investor sentiment analysis to determine the type of scalping trades they make. For instance, if the investor sentiment bias is bearish, the traders generally trade the market on intraday signals from the short side.

Investor sentiment isn’t discussed much in the mainstream media, but it is an important tool in determining market bias. I’m not sure, but maybe it’s not mentioned because it doesn’t have “sizzle” or is as “black and white” as a moving average. Or, perhaps, it’s due to the fact that it is a “smart money” indicator and the “dumb money” wants avoid learning how their emotions fueled the huge turnaround they recently missed. Whatever the reason, the less people educated about market psychology the better the market becomes for the informed trader.

“Smart Money” or institutional investors do the difficult work and look deep at the internals of the market while everyone else waits for the media to explain it. Since it is difficult to find the CBOE VIX or the Put/Call ratio from one source, I need to dig through multiple web sites to determine the current readings of each one.

Here is a site that has a few of the indicators I mentioned http://www.schaeffersresearch.com/.

Robert J. Ogilvie
CIO and Head Trader
http://www.skyboxtrading.com/

Swing Trading and Day Trading, Unknown and Overlooked Differences

I’ve been asked numerous times, what do Swing Traders do and how are they different than Day traders. First, I should start off by saying there isn’t one best way to trade, but it seems almost everyone has an opinion about which way they feel is best.

In the past I would either day trade or swing traded exclusively, but now 90% of my trades are swing trades and the other 10% are day trades. My experience as taught me that combining the two styles offers me the opportunity to capitalize on different market opportunities other traders may pass up.

There basic differences between day trading and swing trading are:

o Time in Trade
o Risks
o Margin Advantages

I’ve been asked numerous times, what do Swing Traders do and how are they different than Day traders. First, I should start off by saying there isn’t one best way to trade, but it seems almost everyone has an opinion about which way they feel is best.

In the past I would either day trade or swing traded exclusively, but now 90% of my trades are swing trades and the other 10% are day trades. My experience as taught me that combining the two styles offers me the opportunity to capitalize on different market opportunities other traders may pass up.

There basic differences between day trading and swing trading are:

o Holding Periods
o Risks
o Margin Advantages

Time in Trade

Swing Traders generally hold positions for days or weeks and the holding period is generally determined from the stocks trend as opposed to the market’s hours for day trades.
Day traders generally start and end the day without any positions in the account. In doing so, the risk of holding overnight positions that open adversely to the trader is mitigated, which is true, but there are a few other risks many day traders don’t think about.

Many people think day trading is less risky since they do not hold positions overnight. In my opinion, this is far from reality since most of the day trading proponents never talk about “commission risk”.

Commission Risk
The risk that the cost of commissions can significantly impact the traders account. I’ve been in this business quite some time and have seen individuals gross $250,000 per year trading and pay $300,000 in commissions producing a net loss of $50,000 for the year. So, if you are going to day trade, keep in mind the risk least talked about, COMMISSION
RISK.

Opportunity Risk

The risk that a better opportunity may present itself after a decision has been made. Traders need to realize if they are going to swing trade, which generally requires more capital than day trading they are more susceptible to opportunity cost. I can find quite a few swing trades per day, but since capital is limited I need to reduce my opportunity risk by screening all possible swing trades for the best opportunities.

Margin (What is Margin)

Day trading does give some traders an advantage, buying power. If an account qualifies to be a day trading account the broker dealer may offer the trader 4 to 1 intraday leverage instead of the industry norm of 2 to 1. Keep in mind, depending on the day traders experience and profitability this can help traders produce greater returns or losses.

Feel free to send me an email if you have any questions.

Until next time take care and trade smart.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com

Why the Media Has Short Squeezes Wrong.

Lately, the media has been talking up a storm about stocks with a high short interest proposing hedge funds are in trouble and need to cover. I find this a bit far from reality since most funds use capital and derivatives more efficiently than the average person thinks.

They, the media, or the so called professional being interviewed, seem to think any stock with a relatively high short interest and a trading day with a high positive net change is a short squeeze. Sometimes this is the case, but not always. Especially for stocks that are optionable.

You see, if a market participant is short an optionable stock and the stock starts to rally, to hedge themselves or, get delta neutral the participant can purchase an option instead of covering the stock in the open market. In doing so, the market participant does not add fuel to the current rally of their short position. Therefore, they can still hold the stock short and not lose any capital.

The theory of the media’s short covering rallies can be valid if the security in question is not optionable. In this situation, the hedge fund does not have derivatives to mitigate risk and to stop the trade from depreciating in value the fund will need to cover the stock in the open market – adding fuel to the rally in question.

Unfortunately, the stocks they were talking about were optionable so I would be suspect about calling that particular rally a short squeeze.

If I were to play the short interest / short squeeze trading game for either a daytrade or swing trade before I can make an investment decision I would need to the following data points increase the probability of a making a wise decision.

1st Gather the data for stocks with the highest short interest and days to cover ratios
2nd Filter out the stocks that are not optionable (this increases transparency)
3rd Look at the largest holders of the each stock and determine
Are solid mutual funds with deep pockets and good returns on the year?
Are the large holders of the stocks in question individuals or other hedge funds?

Take care and happy trading.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://ETFUpdater.com

Leveraged ETFs – The Leverage Mix-UP

I’ve come across many market participants believing if they purchase a leveraged ETF and held it for an extended period of time, the ETF’s performance should double the index or sector it’s benchmarked against.

Please understand this is not the case. The majority seek to provide a 200% DAILY return on the underlying index they track.

Notice I typed “DAILY”!

Noted in the ETF providers prospectus, which I’m sure we all read quite diligently. It is stated the leveraged ETF is designed to double the Daily return, not the total return for time periods greater that one day.

I noticed this while I was helping a hedge fund that trades ETFs quite heavily. The were using the leveraged ETFs to hedge the portfolio and noticed the hedge was not delta neutral. The hedge was actually appreciating more than what the underlying portfolio was depreciating.

So, why does this happen? Why doesn’t it track properly if market participants hold positions overnight? Compounding! Just as we all like compound interest you get the same effect here, except since the ETF can depreciate in price it can work adversely too.

Over time the effect of compounding and leverage can have a significant effect on the total return of the ETF.

Here is an example assuming a $10,000 investment.

Day 1:

The underlying index increases 1%
The leveraged ETF increases 2%

The first day = 200% return, just as we thought, and we outpaced the market, great!

Day 2:

The underlying index decreases 1%
The leveraged ETF decreases 2%

Underlying Index Value: $9,999 (An increase of $100 and then a decrease of $101 on day two)

Leveraged ETF Value: $9,996 (an increase of $200 and then a decrease of $204)

As you can see the index decreased in value $1 over two days and the leveraged ETF decreased $4 over the two days (this is four times the cumulative index loss as opposed to two times the loss).

Hopefully, I’ve explained this in detail enough for you to see how over a longer period of time the cumulative percentage change of the leveraged ETF has the ability to vary significantly from the underlying index.

Here are a few popular Leveraged ETFs:

QLD
DDM
SSO
MVV
SAA
UWM

If you would like to learn more about leveraged ETFs visit my home page http://etfupdater.com or http://proshares.com.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com