Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18
Gold and Silver Kill Zone - 9th Aug 18
Even More Cracks in the Gold Dam - 9th Aug 18
Ignore the Stock Market “midterm election year”, Which is “supposed” to be Weak - 9th Aug 18
Stock Market Trend and Volatility Analysis - Video - 9th Aug 18
Tips on Maximizing Small Serviced Offices Space - 9th Aug 18
VIX’s Collapse is Bullish for VIX and the Stock Market - 9th Aug 18
Vestles Platform Offers Several Key Trading Tools - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 2 - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 1 - 8th Aug 18
Stock Market US Presidential Cycle and Seasonal Analysis - 8th Aug 18
Is the Stock Market Correction Over? - 7th Aug 18
Yield Curve Inversion and the Stock Market - 7th Aug 18
Stock Market Elliott Wave Analysis and Forecast - Video - 7th Aug 18
Trade War! Win the Economic Hostilities Against the Chinese - 7th Aug 18
Technical Analyst Sees Silver as 'Oversold' - 7th Aug 18
Alex Jones Banned! Will Unapproved Opinions Be Censored Off the Internet? - 7th Aug 18
Gold and Silver Stocks On the Verge of the Next Major Decline - 7th Aug 18
First Time Buyers Need to ‘boost the affordability’ of Their Move Alone  - 7th Aug 18
Long Term Care Homes as an Investment are Heating Up! - 7th Aug 18
The Exponential Inflationary Stocks Bull Market - Video - 6th Aug 18
Land Rover Discovery Sport Oil Change Service Dash Warning Message - 6th Aug 18
Restructuring of Western Economic Power - 6th Aug 18
Stock Market Trend and Volatility Analysis - 6th Aug 18
Stock Market and Economy False Narratives That are Just Wrong - 6th Aug 18
VPN – Is It Worth It? - 6th Aug 18
All You Need to Know About Umbrella Companies - 6th Aug 18
Why China Lost the Trade War Before it Even Began - SSEC Stocks Index - Video - 5th Aug 18
Dow Stock Market Elliott Wave Analysis - 5th Aug 18
Iran's Rial Currency Is In A Death Spiral, Again - 5th Aug 18
IMF Produces Another Bogus Venezuela Inflation Forecast - 5th Aug 18
Gold & Silver Precious Metals Monthly Charts - 5th Aug 18
Time to Position for a Decade-Long Bull Market in Natural Resources - 5th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

The Evils Of Leveraged ETF’s and Those That Suggest Them

Companies / Exchange Traded Funds May 02, 2018 - 03:22 PM GMT

By: Avi_Gilburt

Companies

As some of you may know me by now, I run a trading room with over 3500 traders, have over 450 money manager clients, have over 23,000 followers on Seeking Alpha, and have the 6th largest service out of the 169 that are offered in the Seeking Alpha Marketplace (even though I am a technical analyst on that fundamental analysis web site). I have certainly come a long way since I first opened the doors to my trading room a little over 6 years ago.

During the 6 years I have been running my trading room, I have seen what traders do right and what traders do wrong. One of the biggest pitfalls I have seen that trip traders and investors up is the inappropriate use of leverage.


As an investor or trader, you have a responsibility to yourself and your family to preserve your capital. That means one needs to always maintain an appropriate risk management plan, which means you MUST know your entry, exit and stop-out level even before you enter a trade. It also means avoiding the inappropriate use of leveraged instruments.

Anyone with any experience understands that leverage is a double edge sword. When one knows how to appropriately use it, it can turbo-charge returns. But, when one does not, it can take you to the poor house. And, while most people are smart enough to stay away from options if they do not understand them, too many still use leveraged ETF’s. But, most people also do not understand how these leveraged ETF’s work. And, that includes analysts.

Unfortunately, leveraged ETF’s are designed in such a way that if you are not catching a strong trending move perfectly, they will lose money. Even if the market is moving sideways, these leveraged ETF’s lose money. And, if the market moves down, well, they lose money twice or three times as fast. So, unless you are able to time the market absolutely perfectly, then you should NEVER, EVER, EVER buy and hold one of these instruments. They are designed to be a trading vehicle and nothing more.

Yet, greed often gets the best of many investors, which makes these leveraged instruments look so enticing.

Moreover, analysts who want to turbo-charge the returns they can publicize to bring in new subscribers will also gamble on the use of these leveraged instruments. And, yes, I am using the word “gamble” appropriately in this instance, as that is what they are doing with your money when they tell you to buy-and-hold leveraged ETF’s, while promising you the path to untold riches.

I have not yet seen a single instance where subscribers do not blow up their accounts when following an analyst who consistently advises a buy-and-hold strategy using these leveraged ETF’s. I can assure you that those analysts care much more about their win rate than they do about your investment account. In fact, I have seen one analyst that has deleted their model portfolio many times when they have blown up due to inappropriately timed use of these leveraged ETF’s. In this way, he has been able to begin gambling with subscriber’s money all over again, so that he can advertise 500% returns in the last 3 months. Yet, he has blown up accounts each and every year for the last several years.

Real-life Examples
Let me give you an example. There was a “call” by an “analyst” I saw in 2016 which suggested to buy AND HOLD a metals 3X ETF when it was around 25, without any stops, and using much more than 25% of your portfolio. In fact, this analyst did exactly what most amateurs do – they buy at just about the high of the market in an oversized position because they have been sucked in by the market sentiment. In other words, he was simply part of the herd being led to slaughter. And, he backed up his call by promising those who take his suggestion will be wealthy beyond their wildest imagination.

Sadly, for those investing their hard-earned money based upon that “call,” that 3X ETF hit a low of 3.77 only a few months later. For those counting, that is an 85% drop in price in a few months, and it was catastrophic to those who followed this call. Moreover, based upon the way these 3X ETF’s are calculated, the underlying market will have to rally significantly higher than the point at which this “investment” was made in order for those who bought into this suggestion to even break even.

Clearly, this “analyst” has not learned from his massive failures, as he has recently done it again to his subscribers. This time, he supposedly suggested a “buy and hold” on a 3X TECH ETF (TQQQ) just as the market was hitting its highs. And, again, he promised riches beyond their wildest imagination to those foolish enough to follow him. Unfortunately, these investors are now experiencing a whole lot of pain at this time.

So, please allow me to highlight some of the rules to which you always want to adhere in order to protect your capital over the long term, and avoid blowing up your account.

First, one should NEVER buy a 3X ETF as an investment, as it is a trading vehicle and not a buy-and-hold vehicle. Any knowledgeable advisor or market analyst should know this, and if you see an advisor suggesting otherwise, PLEASE recognize that he is suggesting that you gamble with your money.

Second, anytime you enter into trade or investment, you MUST know your entry, exit and stop out level BEFORE you even enter the trade or investment.

Third, you should never place all your eggs or even the majority of your eggs in one basket. Personally, I suggest that investors not use more than 3-5% of their account on any single product or stock.

Again, each and every one of you have a responsibility to yourself, your future, and your families’ future and should not be taking needless risks in an already difficult financial environment. If you follow some simple risk management strategies, and stay away from 3X ETF’s for investment purposes, you give yourself a much better chance of finishing this marathon by avoiding any catastrophic set-backs, from which it could take years to recover.

Since it does not seem as though regulators are protecting the public from analysts like the one noted above. That means it is incumbent on each and every one of you to be responsible for your own trades and investments. And, if someone is suggesting overly aggressive positions utilizing leveraged products for a buy-and-hold scenarios without any risk management plan in place, I would be running for the door as fast as I can, as it is clear that this person does not have your best interest at heart.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

© 2018 Copyright Avi Gilburt - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules