Swing Trading with PowerRatings: Model Trade of the Week in Gold

Recent gains in leveraged gold ETFs are a reminder that scaling-in to short term ETF trades continues to be a way for swing traders to potentially increase both their gains as well as their accuracy rate.

This past week has seen a pair of leveraged gold ETFs, the ^UGL^ and the ^DGP^ rally into strength after earning top upgrades. Earning our highest ratings of 10 out of 10 on September 23rd after closing lower for a third day in a row, both UGL and DGP had already pulled back to levels from which, historically speaking, they tended to reverse and head higher in the short term.

And in both cases, the ETFs finished higher six days after earning our highest rating.

But there are ways that traders potentially can increase these gains. By scaling into the position as the ETF moves lower rather than buying all at once, traders can take even greater advantage of the tendency of top rated ETFs to make significant short term gains.

For example, in the case of UGL, a trader could take half a position when the fund earned its initial rating of 10 and then add the rest of the position when the ETF closed lower the following session (and continuing to earn the same or higher rating.)

UGL chart

This changes the overall cost basis of a potential trade from 89.80 to 88.35. And those savings are passed directly to the trader when it comes time to exit the trade.

A whole position on the ETF’s initial rating of 10 was higher by 0.80% six days later. By comparison, a trade based on taking half a position on the ETF’s initial rating of 10 and the other half of the position on the fund’s lower close (and repeated 10 rating) was higher by more than 2.4% – exiting on the same day as before.

Scaling in is a quantified way for short term traders to take advantage of the tendency of ETFs that are in longer term uptrends to “snapback” after sell-offs. Read more about scaling in with with ETFs here.

For more about swing trading with PowerRatings, visit our PowerRatings page here.

David Penn is Editor in Chief of TradingMarkets.com