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SPECIAL REPORT

3 Ways to Increase Your Gains


Trading Leveraged
ETF PowerRatings
[Author Name] 
A Free Report by Larry Connors
[Type the abstract of the document here. The abstract is typically a short 
summary of the contents of the document.] 

Larry Connors Cesar Alvarez


CEO and Co-Founder Director of Research
   

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Table of Contents

3 WAYS TO INCREASE YOUR GAINS TRADING LEVERAGED ETF POWERRATINGS 1 

1. ONLY BUY 10-RATED LEVERAGED ETFS 2 

2. BUY 9-RATED LEVERAGED ETFS - AND LOOK TO SCALE-IN TO 10 4

3. SELL LOW-RATED LEVERAGED ETFS SHORT 8 

4. SCALING-IN, RISK MANAGEMENT AND STAYING DISCIPLINED 11


3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

3 Ways to Increase Your Gains Trading Leveraged


ETF PowerRatings

For many short term traders, leveraged ETFs provide unique access to a
wide variety of markets – from the blue-chips of the S&P 500, traded in
leveraged funds like the ProShares Ultra S&P 500 ETF ^SSO^ to small
caps of ETFs like the Direxion Small Cap Bull 3x Shares ^TNA^.

But of course, what attracts traders to leveraged ETFs is not just the access
to different markets – it’s the leverage. And from the 2x exchange-traded
funds of Rydex and ProShares to the triple-leveraged ETFs of Direxion,
opportunities for short term traders to potentially maximize their gains with
less capital are only growing in number.

With this in mind, it is clear that our Leveraged ETF PowerRatings, a


simple-to-use leveraged ETF rating system developed by Larry Connors and
his team at Connors Research, has arrived right on time.

Leveraged ETF PowerRatings provide short term traders with the tools they
need to trade leveraged ETFs in a disciplined, systematic way. Based on
analysis and research of a large and growing universe of leveraged ETFs
from inception through December 31, 2009, Leveraged ETF PowerRatings

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

may be the only quantified, backtested way for short term traders to find the
best leveraged ETFs to trade every day.

The results of this research established that leveraged ETFs can be traded
effectively in the short term using PowerRatings. But this same research also
helped us learn some of the ways that short term traders can take even
greater advantage of the already-powerful edges in PowerRatings. What
follows are three of those discoveries. Learn them and see how you may be
able to incorporate these strategies into your exchange-traded fund trading
with Leveraged ETF PowerRatings.

# 1 Only Buy 10-rated Leveraged ETFs

Our highest rated leveraged exchange-traded funds (ETFs), those with


Leveraged ETF PowerRatings of 10, have made significant short term gains
more than 78% of the time. This is based on thousands of simulated ETF
trades in dozens of leveraged ETFs from inception through December 31,
2009.

When you combine this high probability trading accuracy with the fact that
the top-rated leveraged ETFs – the ones with Leveraged ETF PowerRatings
of 10 – had an average return of more than 3% in five days or less, you can

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

see (1) why Leveraged ETF PowerRatings can be a powerful tool for short
term traders and (2) why traders who want to maximize their short term
trading look to the “10s” when it comes time to find the best leveraged ETFs
to trade every day.

There is a caveat, however. In our testing, there have typically been fewer
10-rated leveraged ETFs than 9- and 8-rated funds. This means that high
probability traders who stick exclusively to trading 10-rated leveraged ETFs
will likely enter more profitable trades than the trader who trades a greater
variety of leveraged ETFs, but they will also have significantly fewer trades
over the course of a month or a year.

From a P/L standpoint, there is nothing wrong with this. But traders are
human and after a few days without a leveraged ETF earning a top rating of
10, even the most disciplined high probability trader can get a little impatient
and start longing to trade – even if the historical edges are not significant,
are not on his or her side, or both!

Fortunately, there is a solution for this syndrome. Strategy #2.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

#2 Buy 9-rated Leveraged ETFs – and Look to


Scale-In to 10s

Scaling-in strategies are at the heart of high probability trading. In fact, there
are some high probability traders who would say that if you are not scaling-
in to your exchange-traded fund trades - buying more as the market moves
lower when you are long and selling more as the market moves higher when
you are short – then you aren’t truly making the most of the edges in high
probability ETF trading, including high probability ETF trading with
Leveraged ETF PowerRatings.

Why? Because research in well-documented in books like Short Term


Trading Strategies That Work and High Probability ETF Trading, Larry
Connors and Cesar Alvarez have shown that, in the short term, strategies
based on buying markets after they have moved lower outperform strategies
based on buying markets after they have moved higher. While this may seem
commonsensical to some, the fact remains that the vast majority of short
term traders are still in the “buy high, sell higher” camp of buying markets
after they have moved higher.

This research has not only shown that buying markets, including leveraged
ETF markets – after they have moved lower – outperforms buying markets

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

after they have moved higher. The research also revealed that the more the
market has moved lower, the more likely that market is to rally back
strongly.

In other words, a market that moves down by a point or two should not
necessarily be expected to rally strongly in the short term. But a market that
dives down by 10% or more, according to our research, is a market that has
historically advanced – and by significant margins – in the short term.

How do high probability traders take advantage of this? By buying


additional shares of the market when the market pulls back even further. For
Leveraged ETF PowerRatings traders, this means buying a first unit or
partial position when a leveraged ETF earns a 9, and buying a second unit or
partial position if that fund is upgraded to a 10 at any time while you are still
in the trade.

Let’s take a look at a few examples:

On January 22nd, the Direxion Financial Bull 3x Shares ^FAS^ earned a


Leveraged ETF PowerRating of 9. The closing price of FAS was 70.29.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

A few days later, FAS earned a PowerRatings upgrade to 10. On this date,
January 26th, FAS closed at 67.91.

At this point, the average cost of the trade – assuming equally weighted
positions – is 69.10.

Within days, FAS had moved significantly higher. The fund closed above its
5-day moving average on January 27th at 72.16 for a gain of more than 4%.
By the time FAS lost its top rating (7 or lower), the fund had gained 4.8%.

The early part of this year featured a number of examples of how traders can
use scaling-in strategies to potentially enhance returns in Leveraged ETF
PowerRatings trades.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

Here’s another example. On January 22nd, the ProShares Ultra S&P 500
ETF ^SSO^ earned a Leveraged ETF PowerRatings upgrade to 9 (closing
price 36.66). A few days later, SSO earned an upgrade to 10 on a close of
36.17. What’s more, the next day, SSO earned a second straight 10 rating,
with the closing price dropping to 35.37.

At this point, the average price is 36.07. Again, we assume equally weighted
partial positions or units.

In just one day, this trade was up more than 1%, as the SSO closed above its
5-day moving average. By the time SSO lost its top rating (again, dropped to
7 or lower) a day later, this hypothetical SSO trade was up by more than 3%.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

#3 Sell Low-Rated Leveraged ETFs Short

Would you believe that there is an edge in Leveraged ETF PowerRatings


that is even more powerful than the one the research showed in 10-rated
funds?

The same data that showed that 10-rated leveraged ETFs tended to make
significant short term gains more than 78% of the time also revealed that
ETFs on the opposite end of the scale, those with Leveraged ETF
PowerRatings of 1, were only profitable 19% of the time.

Why is this potentially a more powerful edge than the one we see in 10-rated
ETFs?

Because a leveraged ETF that makes short term gains only 19% of the time
is an ETF that potentially can be sold short correctly more than 80% of the
time.

Consider the example of the ProShares UltraShort Oil & Gas ETF
^DUG^. DUG closed with a Leveraged ETF PowerRating of 1 on March
25.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

With an extremely low Leveraged ETF PowerRatings and a closing price of


12.90, DUG took only one more day before reversing back to the downside.
Closing below its 5-day moving average (and earning a PowerRatings
upgrade out of the “consider avoiding” zone of 1s, 2s and 3s), DUG gained
just shy of 4% in a matter of days.

What’s more, the same scale-in strategies that work with 9- and 10-rated
leveraged ETFs also works with the lowest rated leveraged ETFs, those with
PowerRatings of 1 or 2.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

Above is an example of a short trade in which an initial position was taken


when the ETF had earned a PowerRatings downgrade to 2, and an additional
position taken when the ETF earned a further downgrade to 1.

Here, the ProShares Ultra Gold ETF ^GLL^ closed with a Leveraged ETF
PowerRating of 2 on January 21st. The closing price was 10.24.

One day later, GLL closed higher still at 10.27, earning a Leveraged ETF
PowerRatings downgrade to 1 – our lowest possible rating.

At this point, the average price is approximately 10.26 (10.255). GLL rallied
to close below its 5-day moving average on the first day of February, closing
at 10.02 for a gain of more than 2%.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

Interestingly, traders who took a more aggressive tack could have added
additional units when GLL closed with a Leveraged ETF PowerRating of 1
again on the 27th and the 28th. This would have increased the cost basis from
10.26 to 10.33 and the potential gains to more than 3%.

Scaling-In, Risk Management and Staying Disciplined

Leveraged ETFs are not for trading novices. The potential for sizable gains
through trading leveraged ETFs is very real – but so is the potential for loss.
Because of this, short term traders should make sure that they are careful not
to take on more risk than their portfolio risk tolerance can handle. One
general rule of thumb is to use half your regular trading size when trading 2x
leveraged ETFs, and even less when trading 3x leveraged ETFs.

Another point of caution: no trading strategy, regardless of how effective,


will work as it has historically if the trader using that strategy does not stay
disciplined, taking the right trades when they appear (buying 9s and 10s and
avoiding or selling short 2s and 1s), and exiting those trades at the right
time. Two of the biggest mistakes short term traders can make are (1) not
taking trades when the edges are on your side and (2) staying in trades too
long, letting gains potentially become losses.

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3 Ways to Increase Your Gains Trading Leveraged ETF PowerRatings

All that said, these techniques, the “science of scaling-in”, is one of the more
important contributions that Connors Research has brought to the field of
short term trading in exchange-traded funds. Along with the 2-period RSI
and the importance of short-term volatility, the science of scaling-in to high
probability trades can make a major difference in the bottom line results for
short term traders who learn and embrace these strategies.

To Start Using These Strategies, Please Click Here:

Get Your Free 7-day Pass to Leveraged ETF PowerRatings

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traders with the education and tools they need to make trades based on data -
not emotion. TradingMarkets.com delivers content, tools, data, and trading
systems aligned with the proprietary trading methodologies developed by
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will be profitable or that they will not result in losses. Past results of any individual trader or
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HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT


LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO
NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND
OTHERSLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN
EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE
IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.
SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT
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BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES
SIMILAR TO THOSE SHOWN.

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