Why ETFs?
Since ETFs are made up of multiple equities, they are diversified enough to avoid “single company risk“ and since they represent markets or sectors, they tend to act more like statistical phenomena, which is to say they are more likely to show “reversion to the mean” when they become overbought or oversold. Furthermore, there are LEVERAGED versions of the most common ETFs, which allow us to considerably improve our Return on Investment. And INVERSE versions of some ETFs permit one to “short” a market by buying the appropriate ETF.

Can I trade this in an Retirement fund?
We trade this in our corporate retirement account, and in our personal IRAs. We never Short ETFs per se; rather we Buy (go Long) INVERSE ETFs. (A short signal for QQQ would be traded using QID, a leveraged inverse of QQQ.)

Should I devote an entire trading account to this strategy?
I apply the 10% “slot” to my entire retirement account. But clearly with no more than a max of 4 trades at any one time, we rarely ever have even 30% of our trading portfolio actually committed to these ETF trades. So the majority (70%) of one’s account can be in cash, or in our case something to catch trending markets, like AAPL.

Why have you chosen % Win Rate rather than ROI as your metric/goal?
The short answer is “Signal:Noise Ratio“ — if the basic strategy wins 9 out of 10 times, you will know if the strategy is working much sooner than if your expectation is a 60% win rate. We have found that rarely having a losing trade is VERY reassuring — and enables us to take larger trades, or add option versions to our basic ETF trades. When I first started trading this methodology, I was very focused on ROI. But eventually came to the personal realization that if my win rate was high enough, then I would be confident enough to find some way to LEVERAGE the trade for higher returns — through margin, or options, or greater use of leveraged (even 3x leveraged) ETFs. If 4% is too low an average return for you, then check out my comments below on Account Size.

What can go wrong with this strategy?
=> You can become so used to winning trades, that you can get demoralized by a single loss.
=> It is emotionally VERY difficult to continue adding to a trade that is moving against you — in spite of all the clear research supporting the strategy.
=> If there is a big turn around in the market, we will take our biggest losses — but refer to the Cumulative Profit Curve to see what these actually look like.
=> It can be frustrating to take small wins; however 10% of trades account for 90% of profits, as with most successful systems. At least we ALMOST ALWAYS make trades that do not LOSE money.

How big a trading portfolio do I need to trade this strategy?
This basic methodology can be traded with any size portfolio. Different sized portfolios have different goals, and thus different strategies may be more appropriate, as shown below.

LARGER PORTFOLIOS. The 10% “slots” that I use when reporting my trades are appropriate for a “mature” portfolio of $100,000-$1M — the range that I personally trade in. So for portfolios of $100,000 or greater, I would trade the strategy exactly as posted (i.e. allocating a maximum trading “slot” to each ETF trade) — after enough experience with using the methodology to feel comfortable with this approach. (For ANY size portfolio, I recommend doing a number of these trades using a smaller, nominal size for the trades, to gain experience and confidence with this trading approach.)

GROWING PORTFOLIOS. For portfolios between $20,000 and $100,000 in size, this methodology can be traded using ETFs as posted. However, as some professional traders (such as, Larry Williams) have long pointed out: In order to grow a “smaller” portfolio, you may have to take more percentage risk. The ETF trades as I post them rarely utilize more than 30% of my total trading portfolio. Therefore one could, as I have done with smaller accounts, use a larger “slot” size for these trades. Even doubling the slot size to 20% would rarely have you with more then 60% of your portfolio committed to these trades. And, of course, when we are trading ETFs, you are hardly putting the entire amount of the trade at risk. It is unlikely that the SPY will go to zero value during a swing trade. Margin can be used judiciously to increase even further trade size — but one must be respectful of the risks involved.

START-UP PORTFOLIOS. If you are trading an account smaller than $20,000, trying to build a larger trading account, then it is hard for these ETF trades to succeed as posted given the relative size of trading costs. (Based on my posted results, you would be giving away at least 10% of your profits for even Fidelity’s lowest commissions rate.) For accounts this size, one pretty much has to use OPTIONS to make these trades profitable enough to significantly increase your trading account. Not all option trade versions of these ETF trades are workable. For instance, the basic ETF methodology I use is relatively insensitive to time decay. It is stressful when an ETF trade extends in time past the average 5-day hold, but it rarely has any significant impact on the ultimate outcome. This is clearly NOT the case with an option version of one of these trades. HOWEVER, I do personally take certain option versions of some of these trades, and have gained some experience in when they work and when they don’t. Although I do not have extensive backtesting on option versions of these ETF trades, I am going to start creating a public record of the option trades that I am taking on these ETF trades. I will be posting only simple call and put buy trades in this regard. I will leave more complicated spreads etc. for others to spend time constructing. [My suggestion is always that one do a “miniature” version of the underlying ETF trade when doing an option version, in order to have a better feel for the underlying phenomena.] In a separate dedicated post I will discuss what the potential percentage gains are for various option versions of these ETF trades; but in general I personally expect 10 times the percent gain from an option trade versus the comparable ETF trading. (But one also has to expect a lower percent win rate, and hence more volatility in ROI, in order to achieve this level of returns. I will discuss the parameters more as we move forward,)