As an investor, your most important job is to follow an established trading or investing process. Whether it is using passive investing strategies or following leveraged ETF trading strategies, following a process is critical.
There are countless studies available that will tell you that stock selection is second to the importance of following an established trading or investing process.
Whether it is about having the right asset allocation or using proper position management, the right trading process is critical to investment success.
It is even more important that what stocks, bonds , or ETFs you buy.
An Example: Passive Investment Strategies
I believe that there is no such thing as a truly passive investing strategy. Any investment strategy takes some type of human action to make it work. Consider these words from Cullen Roche when talking about the myth of passive investing:
The reality is that we are all discretionary decision makers in our portfolios. Even the choice to do nothing is a discretionary decision.
Cullen Roche – PRAGMATIC CAPITALISM
Whether it is the Coffeehouse Investor or the All-Weather Portfolio, even these investing styles are programmatic and require process to use them right.
To use them, you need to know which assets to trade, how much to put into each of the assets, when to rebalance, and even when to switch your allocation based on your risk tolerance.
Passive investing strategies require work, just like active trading strategies. What makes passive investing strategies work is that they demand that investors follow the exact steps to build the portfolio.
It is not about whether you buy an index fund from Vanguard or one from Blackrock. It is all about the process used to build the portfolio: the mix between stocks and bonds, the international diversification decisions, the ETFs or mutual funds to purchase.
When using a leveraged ETF trading strategy like the TQQQ Trading Strategy covered on this blog, it is also the process that really matters. Following that process is what makes the strategy work in a way that minimizes drawdowns while capturing the huge gains that TQQQ provides.
In fact, when you buy the eBook about the system, you are buying a process that will help you make money in the market.
Trading 3x ETFs like the TQQQ requires some additional process compared to passive investing strategies. The following tips will help you whether you decide to invest in the TQQQ Trading Strategy or another leveraged ETF trading strategy.
Top Tips for Following Leveraged ETF Trading Strategies
The Process is King
We already covered this above. The investing or trading process is critical. It is especially important when trading leveraged ETFs.
Leveraged ETFs can make you a lot of money very fast. It can also make you lose a lot of money even faster.
That is why a trading process – a very strict set of rule that tell you when to buy and when to sell – is so important. You don’t want to leave your trading to chance. Instead, find a process that works for you and then stick to it.
Consider the TQQQ Trading Strategy if you want to follow a trading process designed for the TQQQ.
Timing Trades is Important with 3x ETFs
Leveraged ETFs are not designed to be buy and hold investments. Even though the TQQQ has had a +50% compounded annual return since 2010, the biggest drawdown has been almost 70%. That would be very hard to sit through.
To avoid that risk of a 70% drawdown, it is important to use leveraged ETF trading strategies that give you indicators that help you determine when to buy a 3x ETF trade and when to sell.
For example, buying at the start of a strong uptrend and then selling when that uptrend starts to break down.
Be Patient for the Right Setup
Patience when trading is extremely important. The best opportunities come when all the parameters of a system line up to generate a strong buy signal.
For example, in the TQQQ Trading Strategy, the system will often sit in cash for a number of weeks until the Green Bar signal fires. However, by waiting for the right time to invest, the gains and drawdowns will be much more consistent. Consider this equity chart to see why waiting for the right time to trade can generate massive gains.
Trade With A Long-Term Horizon
Trading for income is one of the hardest types of trading to do. That is because on a short-term basis, making money in the market can be very difficult.
However, even a solid trading process/strategy can be volatile in the short-term. However, over the long-term the statistical advantage of a well designed system will ensure that the losses are way smaller than the gains.
I constantly remind the 100’s of people that have bought the TQQQ Trading Strategy eBook of this point. A leveraged ETF trading strategy like this one does require a longer-term outlook to be successful.
That is why I have set it up as an eBook as opposed to a subscription service. I want traders to be able to study the process, learn it, and apply it for years to get the most opportunity for outsized portfolio gains.
Don’t Expect to Get Exactly 3x the Returns
This is an important misconception about 3x ETFs. They will not always get 3 times the returns (or losses) of the index they track. For example, the TQQQ may not always return three times what the QQQ does.
There can be a number of reasons for this discrepancy. It may be the fees the triple levered ETF charges, or it may be that there was a slight tracking error that happened in the index on that particular day.
The key is not to expect exactly 3x, but something around that amount.
Risk Management is Critical
Risk management is important at the best of times, but when trading leveraged ETF trading strategies, it is even more important.
Due to the volatility, making sure you practice proper risk management is very important. When a signal tells you to exit (like a Red Bar signal in the strategy on this site), you need to exit.
Preservation of Capital is Also Critical
Your objective with any trading system – be it passive or active – is to preserve capital. Once it is gone it is gone forever.
A good system will have rules and process in place to help preserve capital when the market is acting poorly.
Summary
All investing and trading requires a good process. The process is the most important factor when viewing investment or trading success.
Most people think it is about the asset or security selection. That helps, but if you spend more time on what your trading process is, I am sure you will see a lot of improvement in your trading results.
