Inverse ETF Trading Strategy

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Video Transcription:

Hello, traders. Welcome to the Stock Trading Course and the fifth module: Day trading ETFs.

In this lesson, we’re going to learn the second strategy for trading ETFs and, in this case, we are going to be trading inverse ETFs. This means that we are going to be buying ETFs for a negative move on the underlying assets. And we’re going to use two charts because we are not going to do our analysis on the actual ETF chart, but we are going to our analysis on the underlying asset.

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Now let me show you what we are going to do here. As you can see here, we have the S&P 500 chart on the right and we have the SPXS chart on the left. Now remember that the SPXS is the direction daily S&P 500 Bear 3x ETF. This means that this ETF follows on a negative correlation by three times the moves of the S&P 500. Now the first thing we are going to do is we are going to look at the S&P 500 chart. And we are going to write a smooth stochastic with 21,3,3 inputs on it, okay? Now remember that with the inverse ETF strategy we are only going to invert…I’m sorry, we are only going to trade moves to the downside. Now what we are going to do here is we are going to analyze the S&P 500 chart. And this is the 15-minute chart, and we are going to use the strategy for the 15-minute chart. We don’t want to be trading the one two three or three-minute chart because that is too short term and we want to maximize our profits when we are trading with leveraged ETFs.

Now, the S&P 500 you can see that is has been trading inside a range, and I don’t know if we can call this a range, but what we’re going to do here is we are going to lock in the range with some horizontal lines. We have the resistance right here. Now let me just move it up a little bit right there. And we have the support of the range right here. Again we don’t want to be trading ranges with these inverse ETFs but if the range is big enough, we can trade the upside of the range. Meaning that when price comes back to the top of the range, rejects it and starts to come down, we can start buying the SPSX for a short term trade.

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Now what we’re going to do here is we are also going to look at some trend lines. Let me just zoom in a little bit more and grab the rate tool. Here you go. And we have a nice trend line right here. Now we’re going to zoom out because we already made our analysis, and I’m going to go back to a left and right two chart setup. Now we are looking at the S&P 500 right here after we made the stable bottom on the bottom of the range it came up. And right here we are looking at this exact candle, this dodgy-like candle at the top of the range. If you look at the time when this candle was printed on the S&P 500, it was printed at 3 o’clock in the afternoon and it was printed on October the 13. And if you look on the left on the SPX the cursor also is showing that bottom on October 13 at 3 o’clock. So let me just point it out for you with a rectangle. That we are looking at price action right here. And I’m sorry, right here and it’s the same price action on the SPX right here at the bottom. Remember, we are not looking to make analysis, technical analysis on the actual ETF because what we are trading is a move or a flush or a sell-off on the S&P 500 through buying SPX.

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Now, we have here, and what we are looking for with this stochastic is our signal to sell. And our signal to sell is going to be a crossover or a bearish crossover above the 80 level at an over, but…level. So what we have here is we have the three…what we have a clear setup to sell the S&P 500 by buying SPX. Now, price came all the way up to the top of the range. We made a very long wick candle which means rejection to the top of the range. We have a bearish crossover on overbought territory, so we are going to buy the SPX right after this candle close. Let me just grab the long position tool right here. And this is our position. We are going to be risking…because we are going to put our stop loss above this high, above the week, which means we are going to put our stop loss right here below the week. So we are actually risking only 9 cents on this trade. Because this is an $18, $19 ETF, you can buy… with a limited buying power you can have a bigger position and trade the S&P 500 flush by buying SPX.

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Now how are we going to get out of this position? Well, that’s easy. Our first target is the bottom of the range at 2007.1. Now, the bottom of the range will be in here, which will mean that our first target is achieved right here. That’s a 1.91% gain on our trade. But we are going to hold our position because we want to break in a test of the trend line. And we are also going to be holding our position because the arrow side is still pointing down at these levels. And remember that if you get a bullish crossover at any time, you should get out of your trade. That’s a signal to get out as well as hitting your designated levels. Now if we continue closely and price hits the trend line right here at around the 2002 level, and right here we can close our position because we are in oversold or very oversold territory and our targets have been hit. And if you look at the SPX chart, the target was hit around these levels.

And that’s a 2.67% gain on a trade. And with a $5,000 investment you could have made $133.50 by only risking 24 bucks. And this how you’re going to be trading leveraged ETFs. You are going to…I’m sorry, this is how you’re going to be trading inverse leveraged ETFs. You’re going to look at the underlying asset. You’re going to look for short signals on the underlying asset to buy the leveraged ETF.

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