Anatomy of a Successful ETF Swing Trade

Since GDX has been below its MA(200) [200 day moving average] this month I was looking for a bounce in order to take an inverse position. I determined this ETF was “overbought” when its RSI(2) [top panel] moved above 70 several days ago. When GDX was overbought for two days, I opened my initial position in DUST, its 3x leveraged inverse version. I added to my position again when the trade moved against me. The perfect Exit would be today, when the RSI(2) has dropped below 30 for GDX. (A chart of DUST would show that we entered it when its RSI was below 30, and exited when its RSI approached 70.)

It can be that simple. 

Icing on the cake was that review of the GDX chart showed that it had been rebuffed at its MA(200), and subsequently experienced a convincing decline over the next three weeks. It bounced at its MA(50) (dashed blue line), suggesting an obvious target for when it reversed was that it would test its MA(50) again. I actually exited this trade one day early for +6.4% profit on DUST, and 35% profit on GDX put options. After putting in the order to close the position, GDX recovered slightly enough to technically remove my Exit signal yesterday. But it is not a perfect world, and I did just fine on this 2-3 day trade.

As far as the pragmatics of doing trades like this, I had a simple scan looking for ETFs that were below their 200 day moving average, and yet had just become overbought on their RSI(2). This scan identifies ETF candidates for INVERSE trades. And the mirror image scan looks for ETFs above their 200 day moving average, that pull back to an oversold region on the RSI(2). 

After that I select the specific ETF trade based on various aspects of its chart, and the available leveraged or inverse versions available. The actual management of a given trade is another discussion altogether. But the disciplined “averaging down” approach GREATLY increases the win rate and ultimate profitability of this methodology. And another discussion for a later time is the management of multiple trades using this mean reversion methodology – a portfolio risk management strategy is of most importance for long term success.

Check out the Strategy page and Sample Trade on this website for additional detailed trading examples. I am continuing to have a strong year with this highly disciplined, well backtested approach – applied in real market conditions since 2008.

Good trading.

Jack Loftis 

P.S. I say I win 9 out of 10 of my ETF trades, and tend to have around 10 trades per month. At the end of February, 2015, I had closed 20 ETF trades of which 18 were profitable — exactly 90%. The GDX / DUST trade described above was the first trade in March, bringing me to 19/21 winning ETF trades so far this year. (For a spreadsheet with the precise trades, and their impact on my overall account, email me at [email protected] — where you will see, I increased my net worth by 4.6% in January)

P.P.S. And for OPTIONS traders, these ETF setups result in profitable exits on 75% of my options trades, with overall profit averaging +20% per trade. The profits from my 4 option trades in February would have bought you 24 months of my subscription service.

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