In this trading lesson, I will share the setup I use when day trading the 3X ETF’s. It works for stocks too, but I prefer to watch the leveraged ETF’s, since they can move well on trending days, and I only have about 14 charts to watch. These are short-term trades meant to capture small intraday rallies. It’s a low risk trade that can sometimes catch nice intraday moves. The actual entry can be difficult to identify, but once in the trade, there is little thinking involved.

As price is trending higher on the 5-minute chart, the 10 and 20 period simple moving averages run in parallel. As price pulls back, it will often touch the 10MA before moving higher, and sometimes even pierce the 20MA, before continuing higher. Imagine price is a bouncing ball, and every time it bounces off these moving averages, it makes a dent as it bounces higher from that point, until it finally runs out of momentum. I watch for these impact points, and buy just as it leaves, and try to ride to the next point of impact.

For this setup, I want to see the ETF trending higher on the 5 minute chart and pulling back to the 10, 15 and 20MA’s, which will act as support (I also like to see the 50MA  under the price) . I then look to buy a breakout from this pullback. Once I buy the breakout, I place my initial stop below the lowest of these three moving averages, which is usually the 20MA. As price moves higher, I trail my stop about $.01 below the 15MA until stopped out for a profit or loss. That’s it.

Here’s an example from 10/28/09, TZA.

In this chart, TZA has twice pulled back to these 3 moving averages, which are crossing. In this example, I am looking at the second pullback. Price seems to have found some support, and may be getting ready to move higher. These three moving averages need to have recently crossed, or look like they soon might. It is important that these are not too far apart, or the trade will fail. These moving averages need to contracting or very close.

As price pulls back, I draw a downward sloping line. Once price breaks out of this flag or triangle pattern, I buy. However, the problem with this setup is there are often false breakouts. So I am willing to pay a little more to make sure I am buying a bonafide breakout. In this case, I use one of the higher price bars as my entry. I buy when price has broken this level, usually by $.02.

Price has broken out and I am in the trade. I place my initial stop below the lowest of the three moving averages, which is usually the 20MA. After price continues to move higher, I trail my stop around $ .01 below the 15MA. I will adjust my stop higher with the 15MA, even if it’s just by $.01. I don’t move the stop lower, even if the 15MA moves lower.

When I first started using this setup, I would trail my stop below the 10MA, but was often getting stopped out of larger moves. I then started using the 15MA, and that has proven to be the sweet spot so far.

I trail my stop until I get stopped out, or close the position at the last price bar of the day. I never get out at the top of the move, but I usually catch most of it.

Here are some examples of other trades.


This spreadsheet shows the results of this setup in the 3X leveraged ETF’s from 10/22/09 through 10/30/09 using $5,000, $10,000 and $15,000 position sizes. Although some of these are actual trades I took during this 7-day period, some are the result of backtesting. I tried to be as honest as possible about the setups I would have taken at that time had I been watching them. By no means should this considered a completely accurate test of this system. More testing is needed, but can proide a general idea of what to expect using this trade.

As you can see, the success of this trade is not in the win rate, or in the average gains, but in the small losses.

I am still refining this trade, but so far, I am happy with the results. Here are some tips I wrote for myself that might help you when using this setup:

1. It’s easy to see the setup when looking at a completed chart, but as they are developing, they are not as easy to see. The 20MA is the initial stop, so make sure it is close to the 10MA. These moving averages should be compressed, and should have recently crossed, or look as if they are about to. If these two moving averages are too far apart, the trade will fail, because you are getting in too late.
2. Make sure the ETF has clearly broken out from this impact point. It’s worth paying a little more for confirmation. If you get in too early, you’re probably going to get stopped for a loss.
3. If you got in too early and were stopped out, don’t give up. Keep watching the setup, it may not be completed yet. If you get stopped out for a gain, you still want to watch, as a new setup may be developing.
4. On a strong trending day, multiple ETF’s may breakout at the same time. Just because they breakout at the same time, doesn’t mean they will have equal success. One may get stopped out for a small loss, while the other makes a big run. Try to play both if you can.
5. If you are happy with the gains, you may want to lock it in my moving your stop t a faster moving average, like the 10MA, or just closing the positions.

Areas to Improve

I often adjust my stops too soon when trading on any time frame. This is also true in this setup. In this trade from 11/03/2009, which I posted live in Twitter. I entered FAS but was soon stopped out for a loss of -$.29. FAS moved higher from there, so reentered at the 2nd buy point. I was stopped out for a gain of +$.40.

At first, I thought my mistake was in my entry, but now I realize that my mistake was moving the stop to the 15MA too soon (I also would have made a lot more had a sold earlier). So perhaps I can create a rule that says I will not adjust my stop to the 15MA until after a certain target or time period. Something I will continue to test.

Also note that I wasn’t too concerned about the 200 period SMA above. Normally I would be, but with strong support of the moving averages below and a tight stop, I am willing to take the risk.

Anyway, this is the setup I use. If you want to try it, try it paper trading at first, and then make your own modifications.