The Tycoon Report

8 Rules to Trade this Market to Perfection

Friday, March 28, 2008 | Ethan Roberts

People often ask me questions about short term trading.  They want to know all about day trading, and they are also curious about “swing trading”, which is defined by Investopedia.com as holding an investment position from one to four days.  The most common questions are:

How do you get started?  How do you know what to trade?  Can you really make money at it?  Is short term trading very risky?   Do you know anyone who actually does it for a living?

The prospect of maybe quitting one’s day job in order to trade for a living is a fantasy that many people have, but few ever realize.   Some tried it during the late 1990’s, did well for awhile, but then lost their shirts in the 2000-2002 tech melt down.  Others daydream about maybe trying it one day in retirement, but they worry about losing their savings, and not being able to replace those funds at an advanced age. 

This is the story of Ben, a trader who thus far has successfully turned his retirement dream into reality.  He has been swing trading for several months now, and recently began to specialize in trading the Ultrashort QQQ Pro Shares, (symbol QID), which is the exchange traded fund, or ETF, that double shorts the NASDAQ 100.  The QID is extremely volatile, because it moves twice as much, and in the opposite direction, from the NASDAQ 100.  On a day when the NASDAQ 100 falls 2%, the QID will be up about 4%.  When the NASDAQ 100 is up 1%, QID will be down about 2%. 

Ben lives in New York City.  He is in his upper 50’s now, and had worked in the commercial collections industry for over 30 years.  Ben is a hard driving guy and usually excels at whatever he attempts.  He has a keen ability to analyze things correctly, and the courage to act confidently when he knows he can master something.  I personally have known Ben for about 20 years, so when he tells me that he’s on to something big, I listen. 

Ben has owned stocks and mutual funds for a very long time.  He is a better than average trader when he buys or sells individual stocks.  But when it comes to trading the QID, Ben may have no equal!  In fact, I now call him “The King of the QID”!  What is the reason for his grandiose title?

Over the past 36 closed QID trades, Ben has made a profit 36 out of 36 times!!!

That’s right, a perfect 100% batting average!

Skeptical?  Sounds like hogwash, doesn’t it?  But Ben has the documents to prove it.  And I have been in daily contact with him since he began trading the QID, and have followed his results. 

After Ben told me about his perfect record, two inspirational ideas came into my mind.  The first is that we could create one of those “Make huge profits!” type web sites and charge a lot of money for revealing this method.  The second was that I could simply detail Ben’s method for “The Tycoon Report” readers for free. 

I am choosing to go with my second idea, because personally I hate those dopey “get rich quick” web sites, and because using this method can make us just as much money.

But before I share with you the details of how the “King of the QID” has traded a perfect 36 for 36, I want to make sure that I offer you this caveat:

1)    Day trading and even swing trading can be very risky.  Only use money you can afford to lose.  Do not ever use the mortgage, utilities, or food money!
2)    Do not day or swing trade until and unless you have no debt (other than a mortgage), have a fully funded 401k or IRA, and you have a 3-6 month emergency fund in a bank or money market. 
3)    Any method, including this one, should be tried ON PAPER for a couple of weeks before you risk one dime of real money.
4)    Never trade when you are sick, upset, or distracted by other things going on around you.
5)    Never risk more than 5% of your total capital on any one trade.
6)    Always know your exit price in advance, whether on a gain or loss and stick to it.
7)    Just because it worked well for this one investor, doesn’t mean it is guaranteed to work well for anyone else.  Your performance may be better or worse than his. 

Ok, enough of the hedging, let’s get to it.  I recently interviewed Ben to learn how he trades the QID so successfully.  This is the interview that took place:


Ben, what is the length of time that you have been trading the QID?

I have been trading the QID for 2 months.

What is your total profit so far?

My total profit is $15,582, based on 36 trades.

How much is the average profit per trade?

After commissions, but before taxes, the average profit per trade is $416.83

How much in commission do you pay?

I pay $8 per trade. 

What is your profit versus loss record on the 36 closed trades?

I have 36 winning, closed trades, I’m still undefeated.  I am currently holding two other buys.

What is the average time that you hold a position?

The Average time QID is held is a little over two days. 

What is the most and the least you ever invested in a QID trade?

The highest amount invested in one trade was $45,200. The lowest amount invested in one trade was $6200.  The average amount invested each time is about $9000.

What is your philosophy about trading the QID?  How do you start the day?

I feel on the average the QID fluctuates 1.50- 2.50 per day. I look closely at the futures in the morning to get a gauge of what I perceive the opening to be. In addition, I look at the business news of the day.  I look at pre market trading, volume, and prices relative to where it closed the night before.  On occasion, I have bought in the pre market at what I feel is a good price and done well, at other times the opening price has been lower than pre market trades.

If I have not bought in the pre market, I rarely put in a buy for the opening. I like to see how patterns develop for the first 15 minutes of trading.  Then I gauge the highs and lows over the course of the first 60-90 minutes and follow closely the activity of the NASDAQ, which QID tracks inversely.  On many recent occasions, I have put in a buy order, when the price was 54.00 or higher, for a lower price as I see the NASDAQ moving up. I don’t chase a price, for as we well know the market rarely goes straight up or down.  Over the course of a trading day, the Dow and NASDAQ can vary as much as 3% on the up or down side.

To what do you attribute your success?

I feel the success I have been achieving is by following the NASDAQ and when contemplating a buy, constantly checking for a rapid update of the QID price, trying to get the best price.

Conversely, when selling (which I still want to improve), my success is the amount of profit attained. I strive to buy and sell in one day. However, I am not averse to holding, in some cases up to two weeks, to realize a profit. That was more the case when I initially started trading and I wasn't as cognizant of the market volatility. 

Do you use any technical indicators when you trade?

I have only used the RSI so far.

Do you use market orders or limit orders?

I use 100% limit orders.

Do you ever use stop loss or stop limit orders?

No.  If the market goes higher for a few days, intraday there are opportunities.  However, if the market really started heading upstream, at the slightest pullback before the next surge, I would sell for a loss.  Also, if I felt that a bull market was in the making, I would hedge by going long on another ETF, as I did last week by buying UYG (Ultra Financial Pro Shares ETF).

What is your goal for trading the QID?

My goal is to realize 5% or more of my investment, per trade. However I have profited as little as $58 (after commissions) if I feel the trading day is stale from the view point of upside and downside.

What was your greatest profit?

My greatest profit in one order was $1875, achieved as I was holding 500 shares at 50.70. There was dramatic bad news that morning.  I don't recall what specifically, and the market was going to open significantly lower. I put in a sell order, and was rewarded with a sell of 500 at $54.45 for an $1875 profit, achieved overnight!

It would be easy to say that your recent success trading the QID is largely due to the fact that we've had a bear market.  If the market turns around tomorrow, will you switch to one of the ETF's that is long the NASDAQ, such as QQQQ or QLD?  And how long would you wait, or perhaps even lose money on a QID position, before you did that?
 
I would not hesitate to go long on an ETF in a given day, whether it is a sector ETF, or a more generic one such as the QQQQ, or QLD.  However, even on a positive day as the market had on March 11th, I bought 700 shares of QID at 55.22, and sold at 55.71 for a $343 profit.  Intraday trade is where I feel the best opportunities lie.  Knowledgeable after two months of trading the QID, I strive not to expose myself to buying when the price is over $56, in case there is a market turnaround.
 
So Ben’s trading method can be summarized as follows:

1)  Study the pre-market news, as well as the QID price and volume, to determine the most probable direction for the NASDAQ market that day
2)  Do not buy on a market order at the opening, but instead put in a limit order for a lower price or wait for a lower move by the QID, before initiating an order.
3)  Never chase a price- instead, wait for the market to come back to you.
4)  Continuously monitor the price throughout the first part of the trading day.
5)  Seek a profit objective of 5 percent or more on each trade.  On a $9000 average trade, the objective would be a minimum gain of $450.
6)  Be willing to hold onto the QID position for as little as a few hours to a maximum of two weeks in order to achieve your desired profit.
7)  Sell when you feel the QID has either achieved your objective or if the market seems to lack the impetus to propel the price further in your favor.
8)  Be flexible to close out your position quickly if the market conditions change.

Ben’s method is certainly not as complex as many of the trading systems that people use, and may even seem simplistic to some.   Although the basic premises are sound, it is not what one would call “scientific”.  Yet one thing that he does very well is to maintain his cool when the direction of the trade is going against him.  He is patient because he has learned that eventually the QID will swing back in his direction.  It may be that day, or it may take a few days.  But either way, he does not panic and sell prematurely at a loss, as many traders do.  He has studied the parameters of what he is trading, and knows the daily highs and lows, as well as the average price range.

This knowledge helps him to make better determinations of when to buy and when to sell.  His focus on one primary ETF allows him to know all of its nuances, its rhythms, and its behavior.  Like a parent who instinctively knows when their child is well or sick, he can read the temperature of the QID, and act accordingly.

Yes, Ben’s trading method is simple.  It is the simplicity of his method, and his ability to stick to a working system without deviations, that have created the perfect results so far.  Too many traders find something that works, but then go off on tangents that kill their previous results.  He is not a professional trader, and he doesn’t trade hundreds of thousands of dollars a day.  He is just a regular guy who has discovered a method that works very well for him, and he is enjoying the returns he gets on his way to living his retirement dream.  He makes sure that he only trades with money he can afford to lose, yet paradoxically so far he hasn’t had lost any of it!

So if you are struggling to improve your current short term trading results, or are thinking about trying some short term trading, no matter what particular stock or ETF that you would like to trade, consider using some or all of the principles that have earned Ben the title of “King of the QID”!




Ethan Roberts
Contributing Editor
The Tycoon Report