Hi Allen,
I was interested in the article because I like to trade the Leveraged ETFs (TNA is my favorite) and I have been a follower of Clive's idea of using only a fraction of the cash assigned to a particular trade since he first mentioned it several years ago, so I generally use only 1/3 of the available cash for TNA. I had also read another article that referred to back testing to recommend 2.5 Leverage as the ideal, but I cannot presently locate that article.
I subscribe to VectorVest and do most of my charting and back testing with that software. I decided to run some tests using TNA, UWM (2X), and IWM (basic ETF). First I ran a Buy & Hold test from the low point of 3/9/2009 through yesterday's Close 9/7/2017 for each:
IWM UWM TNA
Total Gain +294.54% +1,109.96% +1,835.41%
ARR + 34.66% + 130.61% + 215.97%
CROR + 17.53% + 34.09% + 41.71%
Max DD - 29.40% - 52.74% - 70.56%
That Max DD occurred in the August/September of 2011.
You can see that the 2X ETF, UWM, gained about 3.77 times the basic, unleveraged ETF, and TNA gained about 6.23 times more. This is in an Up Market Trend, but with plenty of "pullbacks". Could you "stomach" that pullback? I couldn't! I would have a hard time with the IWM pullback.
TNA didn't exist until November 2008 and UWM not until February 2007, so I couldn't realistically test them through the GFC, but UWM suffered a loss of -87% when purchased in Feb 2007 and held to yesterday. It ended that run at +58.63% for 10.5 years.
To get a more viable look, I ran two tests on IWM from the low point on 10/9/2002 through yesterday -- the first test run was just B&H through the GFC and the second run "exited" at the high point on 7/9/2007 and re-entered at the low of 3/9/2009. For all of these runs, I used the Next Day's Open for prices.
B&H No GFC
Total Gain +327.49% +921.91%
ARR + 21.96% + 61.82%
CROR + 10.23% + 16.87%
Max DD - 59.89% - 29.40%
I don't know if my conclusions are the same, or similar, to yours, but it seems to me that the most important factor in this series is "TIMING"! In an Up Trend, the Leveraged ETFs are seriously better than the basic, but in a Down Trend they are much, much worse. I agree with Clive that using Ocroft's idea provides a better alternative -- I would want to use it for both entries and exits because I tend to be an "All-In/All-Out" type of trader.
Bob
