Thursday, November 18, 2010

Update on How to Use this Information

I forgot to include one important aspect of any trading system that uses what is presented at this site. That is, what instrument should be traded? I am tracking the Dow, so you would naturally think trading Dow futures or a Dow ETF. However, I've noticed that the results track far better with the S&P, and in fact, returns are generally higher with the S&P anyway. Options can also be traded, but it's a far more dangerous game. If I were to trade options, I would stay with index ETFs like the SPY and only buy at the money with an expiration date at least one month out.

What I Wouldn't Trade:

I'd never trade outside anything that tracks the Dow or S&P. That means, I would not trade the NASDAQ or any individual sector ETF. There is no guarantee that an individual sector will be up if the prediction is for the Dow to be up. This is surely a bad approach. I'd never trade out of the money options. There's no guarantee I'd make money on a small move in the market, but I would make money with an ETF for sure. A lot of times I've noticed that the moves are pretty small, so going out of the money is a bad idea.

3x ETFs

For long positions:

UPRO - 3x S&P Bull
UDOW - 3x Dow Bull

For short positions:

SPXU - 3x S&P Bear
SDOW - 3x Dow Bear

Any of these would work well with this system. If you want less leverage, I would use the 2x or single ETFs. However, in a system that relies on what amounts to day trading, leverage is what will help you make an acceptable amount each day. It all depends on the size of your portfolio and how much you hope to make each day. If a portfolio is over 100K, then a single ETF with a profit objective of 0.25% would be $250 a day. Whether that's enough depends on the person. If a portfolio is only 25K, a profit objective of 0.25% would be hardly worth it, but using leverage, taking a 3x fund gives you the equivalent of 75K and a 0.25% next day gain would be 0.75%, or around $200 a day.

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