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July 18, 2012

How To Trade High Probability

Leveraged ETFs

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Disclaimer: Connors Research, LLC ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. 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 THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. Connors Research, LLC 10 Exchange Place, Ste 1800 Jersey City, NJ 07302 Copyright © The Connors Group, Inc., 2012.

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Welcome!

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Part 1 – How To Trade Leveraged ETFs

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Of the many investment instruments we have run studies on, Leveraged ETFs tend to have amongst the historically highest directional predictability. The reasons for this are likely due to the fact that most Leveraged ETFs are made up of equity baskets. Equity baskets tend to move from overbought and oversold on a short-term basis.

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The fact that Leveraged ETFs by their nature are “leveraged” allow for these small back and forth movements to be amplified.

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This is especially true when the leveraged ETF basket is stretched too far (meaning it’s oversold to extremely oversold).

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In order to properly take advantage of this behavior, there are two key elements that need to be in place.

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1. The Leveraged ETF has to be oversold.

The more oversold it is, the greater

the historical returns have been.

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2. The second is you want to exit the Leveraged ETF position as quickly as possible once its reversed higher.

There are a number of ways to do

this and we’ll look at them as we move ahead.

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Combining oversold conditions with a rapid exit is the key to trading Leveraged ETFs.

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Let’s now move one step at a time. The first is “How To Identify When A Leveraged ETF is Oversold”

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Part 2 – How To Identify When A Leveraged ETF is Oversold

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There are many ways people identify when a Leveraged ETF is oversold. Unfortunately, most of those ways are “guesses” using non-quantified approaches with little, or no statistical evidence that there are edges in place.

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We use a “structured statistical approach” to our Leveraged ETF Trading. This means that we have exact rules in place which are logical and have many years of statistical backing. This is the way the best hedge funds and trading firms are making their trading decisions today and you want to do the same.

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One of the best ways to identify an oversold Leveraged ETF is to use the 2-period RSI. It’s simple, it’s efficient and the test results show that it continues to work.

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There are different 2-period RSI levels you can use to trigger buy signals. They range from a 2-period RSI reading of as high as 15 to as low as a 2-period RSI reading of 1.

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Here are the advantages and disadvantages of the different RSI levels.

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The higher the RSI level, the less oversold the position, but more positions will be filled. The lower the RSI level, the more oversold the position, but fewer positions will be filled.

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This is where you have the opportunity to customize the knowledge from this presentation.

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More aggressive traders will likely use the higher RSI levels.

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More patient, conservative traders will wait until the levels reach extremes before entering. Customize this based on your own goals and trading style.

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Part 3 – How To Enter a Leveraged ETF Position

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1. One of the better ways to enter a position is in full; meaning going to a full 100% position as soon as the ETF closes at the RSI level you’ve identified as being the level you decide to trade.

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2. The key from here is to then buy the ETF on a further intra-day pullback the day following the extreme reading.

What you are doing is identifying an oversold Leveraged ETF with the 2-period RSI, and then waiting for it to become even more oversold intra-day.

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Here are the rules: 1. The Universe is 2x Leveraged ETFs (no inverses). 2. The 2-period RSI is below X (X=15) today on the

close. 3. Tomorrow buy Y% (Y = 2%-5%) below today’s

closing price. 4. Exit when the ETF closes above its 3-period

Simple Moving Average.

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Let’s look at the test results.

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Top 10 Simulated Trading Results Universe: 2x Equity-Long Only Exit Timing: Current Close

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# Trades Avg %

Profit/Loss Avg Bars

Held % of

Winners Worst Trade

% P/L Best Trade

% P/L

RSI2 Entry Setup

Entry Limit % Exit Method

86 3.70% 3.3 74.4% -24.68% 32.29% 5 5 C > MA3

112 3.44% 3.2 76.8% -25.59% 32.29% 5 4 C > MA3

208 3.09% 3.3 70.7% -31.65% 29.42% 15 5 C > MA3

141 2.80% 3.2 75.2% -26.36% 32.29% 5 3 C > MA3

285 2.73% 3.3 72.6% -32.36% 29.42% 15 4 C > MA3

176 2.43% 3.1 75.6% -26.77% 32.29% 5 2 C > MA3

366 2.20% 3.3 68.0% -33.06% 29.42% 15 3 C > MA3

209 1.95% 3.0 72.7% -26.77% 32.29% 5 1 C > MA3

446 1.67% 3.3 68.2% -33.74% 29.42% 15 2 C > MA3

557 1.48% 3.1 68.6% -34.18% 29.42% 15 1 C > MA3

Part 4 – Exiting Your Leveraged ETF Position

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As many professionals have stated over the years, it’s even more important to know when to exit a position than it is to enter. Guessing where to exit (and most traders do guess) is not the proper way to trade. Having precise exits is a key part to successfully trading Leveraged ETFs and we’re going to now look at specific exit strategies and their test results. 30

Here are the exits we’ll focus on: 1. Exit on the first up close. 2. Exit when the Leveraged ETF closes

above its 3-day simple moving average 3. Exit when the Leveraged ETF closes

above its 5-day simple moving average 4. Exit when the Leveraged ETF closes

above its 2-period RSI reading of 50

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1. Exit on the First Up Close

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This is an interesting exit which gets out of a position very quickly. You simply exit the position the first day the Leveraged ETF closes higher than the previous day.

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2. Exit When The Leveraged ETF Closes Above Its 3-day Simple Moving Average

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This exit triggers when the Leveraged ETF closes above its 3-period simple moving average. It’s one of the better exits for all short-term trading.

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3. Exit When The Leveraged ETF Closes Above Its 5-day Simple Moving Average

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This exit triggers when the Leveraged ETF closes above its 5-period simple moving average. It’s also one of the better exits for all short-term trading.

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4. Exit When The Leveraged ETF Closes Above Its 2-Period RSI Reading Above 50

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This exit triggers when the Leveraged ETF closes above its 2-period RSI reading above 50. It’s one of my favorite exits to trade Leveraged ETFs with because it does a good job of balancing, allowing for a move to occur while at the same time often getting out very quickly (the less time you’re in a position the better because this lessens the overnight risk). 39

Let’s look at the test results.

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Top 10 Simulated Trading Results Universe: 2x Equity-Long Only

Inception through 4/30/12

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# Trades Avg %

Profit/Loss Avg Bars

Held % of

Winners Worst Trade

% P/L Best Trade

% P/L

RSI2 Entry Setup

Entry Limit % Exit Method

110 4.70% 4.0 74.6% -27.21% 33.07% 5 4 RSI2 > 50

109 4.58% 4.4 72.5% -27.21% 33.07% 5 4 C > MA5

85 4.52% 4.0 72.9% -26.47% 33.39% 5 5 RSI2 > 50

85 4.27% 4.5 69.4% -26.47% 33.39% 5 5 C > MA5

137 3.90% 4.0 73.0% -27.21% 32.29% 5 3 RSI2 > 50

135 3.87% 4.5 72.6% -27.21% 32.29% 5 3 C > MA5

202 3.73% 4.0 73.3% -33.27% 28.39% 15 5 RSI2 > 50

86 3.70% 3.3 74.4% -24.68% 32.29% 5 5 C > MA3

170 3.54% 4.3 74.7% -27.21% 32.29% 5 2 C > MA5

172 3.44% 3.8 72.7% -27.21% 32.29% 5 2 RSI2 > 50

Bonus - The Machine Screener

Let’s look at how you can identify Leveraged ETF edges throughout

the day.

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For a free trial to The Machine Screener please call 1-888-484-8220 Ext 3.

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Questions and Answers

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Thank You!

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Disclaimer: Connors Research, LLC ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. 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 THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. Connors Research, LLC 10 Exchange Place, Ste 1800 Jersey City, NJ 07302 Copyright © The Connors Group, Inc., 2012.

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