Triple leveraged drawdown selling rule

[ken-do-nim]

Hi all,

I spent an hour or so pouring over financial charts of my beloved triples today, and I came up with a simple, effective algorithm to ideally make sure I don't get fleeced on these things. Basically, you plot a line between the most recent bottoms and sell when the price falls say more than 10% below that line.  It doesn't work as well when they are moving horizontally, but this strategy should allow me to take maximum advantage of a spike.  I wonder if this should apply to other equities as well.  

Let's start with the poster child of spikiness - NAIL.



In the great spike of 2018, had I owned it then, I would have looked to exit once it dropped below $100/share, because that's when the big advance ended.

In the covid drawdown of March 2020, the rule would have said exit around $85/share.  

Currently, the line plotted by the two most recent bottoms points to an exit around $63/share, which it is well above.

Now let's move on to the old stalwart, TECL; arguably the "safest" triple.



2018 had a relatively modest drawdown as far as triples go, but this rule would have still kicked in around $15/share.

The covid drawdown of March 2020 was massive, but I would have gotten out around $28.  (Fun fact: I didn't.  I watched it drop all the way down..., from the $40k I had at the start to about $12k at the bottom.  Yes it did return in just a few months but that's missing the point.)

Currently the line I've plotted says get out around $38.  Note that I'm using a bottom a little farther back than "the most recent two".  Art more than science here.

Onto SOXL:



SOXL was very choppy in 2018.

2019 had a little spike, and I would have gotten out around $12.

The larger 2019-2020 spike going into the covid drawdown would have had me out around $17.

Current momentum points to a $36 exit point, which it is only slightly above.

And DFEN:



A nice run from 2017 into 2019, and depending upon which bottoms you pick, of course, but I would have definitely been out by $47ish.

Then after the drawdown, 2019 into the covid bust - wow what a decimation!, I'm happy to report this rule gets you out at $59 or so.  

Currently the line plots to a sell out rule around $17.50

Finally, we come to LABU:



If I'd had this rule in place, I would have gotten out around $130.  Sigh.  But for someone buying this right now, it's trickier, so I plotted a line against some previous bottoms with the most recent one of just a few days ago.  Current exit is a tight hook at $76.  LABU is like that reliever who strikes out a lot of guys, but gives up the longball and loses the game for you too often.

*****

Not addressed yet is after you sell, how to know when to get back in.  I think the logical answer is when you can plot an upward line again and state a new exit point which the stock is currently above.

[ken-do-nim]

Here's a bonus one, PEGA, to see how the rule fares against a normal tech company:



Following the rule, I would first have exited at $122ish, which turned out to be a narrow bottom and I probably would have gotten back in at the same amount.

But the most recent climb would have had me exit at $131 or so.

I can't put a current exit price on it because the trend now is downwards.

[NilesMike]

There's a much easier way IMO.

Chart (weekly) the actual sector, when RSI is under 30 be alert. When RSI is then >30 (EOW) buy a long dated (10-12 months) call just OTM. That's you entry.

If/when RSI closes around or above 70, you sell. There's your exit. Mechanical not emotional.

Less money at risk per trade but the returns will not be 3X, more like 4-5X

[ken-do-nim]

(03-31-2021, 04:10 PM)NilesMike Wrote: There's a much easier way IMO.

Chart (weekly) the actual sector, when RSI is under 30 be alert. When RSI is then >30 (EOW) buy a long dated (10-12 months) call just OTM. That's you entry.

If/when RSI closes around or above 70, you sell. There's your exit. Mechanical not emotional.

Less money at risk per trade but the returns will not be 3X, more like 4-5X

I will study what you just wrote and look up all the acronyms, because I didn't understand a word of it 

[NilesMike]

RSI is a momentum indicator available with most/all charting programs.

EOW= End of Week

OTM= Out (of) The Money ( Above current price.)

[fenders53]

This should be a good thread. We'll get a few more of the guys that understand options to check in, because you are indeed playing options with no knowledge of them. You can correct that. I know I owe you a vid link soon. You don't have to be an option guru and you don't have to be a technical analysis guru, but flying totally blind isn't investing. You are currently sitting at a poker table in Vegas with sunglasses on hoping it goes your way. You'll get killed without a plan and it likely won't take too long.

Looking at the NAIL chart made me pee myself just a little lol. Your plan can be a work in progress. Heavily invested in any of this before you educate yourself is risky, but some simple rules are a great step forward.

Back to Mike's point it definitely needs to be mechanical to have a chance at success. You have to minimize the natural emotions of fear and greed. You are probably feeling fear on LABU, and greed on SOXL. I happen to think SOXL works out in the midterm from here. We'll see.

A few more bits of advice is diversify the 3X leverage game. If they all move together it's way too much to manage at one time when your port is getting beat up. I would 3X something that goes counter your most aggressive positions. But that's just me. I don't prefer to lose sleep when it all goes to hell and I bet the wrong direction. I run multiple strategies and a believer in "baskets". Whenever a part of my port is getting punished, something else is almost always holding the line for the day. I'm just not OK with my port dropping 5% in a week when the overall market is not anywhere near that bad. That 5% can be 25% in a few weeks if you are leaning too hard in a sector direction.

[ken-do-nim]

Yes I've made it all completely mechanical now. I have my target sell numbers. My sunglasses are already cracked, since I've now suffered two major drawdowns:
1) TECL when covid hit. Sure it came back to where it was in just a few months, but that still doesn't excuse not selling when it started to tumble.
2) LABU's rise and fall. From the point of view of "bought at 60, sold at 70 in a year" it sounds like a normal stock, but that overlooks the fact that I could have made a ton of money on that rise.
With these new target sell numbers, I'll be selling high and buying low with these much more often. I think it will be rare for one of these funds to go longer than a year without a dip that causes a sell. This *could* be really awesome.

To your point about diversification, I've done well with that. I didn't display all the ones I have. I have FAS which is financial, RETL for retail, SPXL for the S&P 500, and yeah they all go in different directions on any given day. TECL and TQQQ are the most closely tied since they cover the same stocks with just different weighting. Admittedly I have way more money in TECL and SOXL than any of the others, but that's partly because they earned it. Also I'm trying to move the triples all into my ROTH and out of my taxable. My ROTH is currently 100% triples and I do plan to keep it that way.

I'm looking forward to learning about options, calls, & puts.

[fenders53]

Tax free account is the place to do this. You have to be able to make moves when it's necessary.

[vbin]

You can also look at MA( moving averages) rather than simply exiting below 10% from previous low. When a stocks breaks a 50MA usually it's a bulish or bearish(depending on the direction) sign. A lot of traders take 200MA very seriously.

[vbin]

(03-31-2021, 04:10 PM)NilesMike Wrote: There's a much easier way IMO.

Chart (weekly) the actual sector, when RSI is under 30 be alert. When RSI is then >30 (EOW) buy a long dated (10-12 months) call just OTM. That's you entry.

If/when RSI closes around or above 70, you sell. There's your exit. Mechanical not emotional.

Less money at risk per trade but the returns will not be 3X, more like 4-5X

Which charting platform u use?

[NilesMike]

THINKORSWIM

[ken-do-nim]

(04-01-2021, 05:24 AM)vbin Wrote: You can also look at MA( moving averages) rather than simply exiting below 10% from previous low. When a stocks breaks a 50MA usually it's a bulish or bearish(depending on the direction) sign. A lot of traders take 200MA very seriously.

I will read up on moving averages, but do note that my rule is not as simply stated as "10% from previous low".  You line up 2 or more previous lows and plot a course. It likely works out to about the same figure as the moving average does, but with perhaps more precision because rather than just taking 50 days or 200 days it identifies a trend line and gets you out when the trend breaks.