ETF Trading Strategies: 3x ETFs and the 200-day MA
Yesterday we looked at the universe of 3x ETFs available to trade.
Today and tomorrow, I’d like you to do some homework.
As you know, I have been publishing research on the 2-period RSI since 2004. It touches many of our trading strategies and the research behind it was also published in my latest book “Short-tem Trading Strategies That Workâ€. I know many of you are successfully appling it to your own trading which is good.
Also, published in my book, is the research confirming trading in the direction of the 200 moving average. We statistically showed that stocks should be bought above the 200 day, not below. I originally published that research nearly a half decade ago and it’s been a blessing for many traders and investors keeping them away from those stocks and ETFs that broke under the 200 day over the past year.
Today, let’s put those rules together and I’ll have you quantify them on the 3x ETFs.
Take yesterday’s list of the 3x ETFs that I placed in the Trading Lesson of the Day, and buy them above the 200 day when the 2 period RSI closes under 5 and then sell them when they close above the 5 ma. On the short side, short them below the 200 day ma when the 2 period RSI closes above 95 and cover them when they close under the 5 ma.
You won’t get 200 day ma readings for most of the 3x ETFs (most have not been trading that long) so therefore use a surrogate index to let you know where the 200 should be. For example, if you’re looking at the 3x Big Cap, you should use the S&P 500 as your guideline. If the S&P 500 is below the 200, you’ll assume the Big Cap 3x is also below the 200 (it’s a good assumption).
The key of this exercise is to get into the rhythm of trading ETFs on an overbought and oversold basis, no matter what the underlying ETF is. It also gets you in the habit of quantifying your trading which is one of the most important things you can do as a trader. As I like to say “Opinions are fine, but statistics are better and they should guide your tradingâ€
Good luck with this assignment and send me the results if you like. I think you’ll be pleasantly surprised.
Special Note — Tomorrow afternoon I’ll be doing a final presentation on this weekend’s High Probability ETF Trading Seminar. There are over 200 people signed up for the presentation so if you would like to attend, you’ll be able to via our conference line. It starts at 4:30 pm ET and runs about 45 minutes. To reserve a spot, please call 213-955-5858 ext 1.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.