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A winning strategy for trading leveraged ETFs

December 22, 2022

I have been trying to think of a strategy to generate cash from our investments and here is a possible one. It is based entirely, or almost entirely on the trend in the Coppock Indicator. Above is a chart of SOXL, an ETF which tracks semiconductor shares with three times leverage and daily rebalancing. It is very volatile but that is perfect for our purpose.

IG only allows you to buy leveraged ETFs in a share account so that you don’t pile leverage on leverage. It also has a rule that if you trade three times in a month in a share account you pay no commission. This strategy is designed to take advantage of that fact and should be both profitable and low risk.

The leveraged is built in to the investments so this is not a margin account. Whatever happens you can never be forced to sell.

Buying when Coppock is rising, selling when it starts falling

So what do we do? As soon as we see a blue Coppock buy signal we start buying (I will advise you when this happens and all other relevant signals). We can buy in small quantities to see how it goes but we buy weekly to make sure we do at least three trades a month. So once we have a rising Coppock we start buying say 250 shares a week (when we – notionally – started the price was just $0.38) and we continue doing this as long as the Coppock line keeps climbing. We are going to end up with quite a large holding. Reading off the chart we keep buying for 34 months or 136 weeks until Coppock starts falling.

Our average price is around $1.12 so we will end up investing 136 x 250 x $1.12 = $38,080 for 34,000 shares. Our selling price is around $2 so we gross $68,000 less one commission of $15 and our profit is around $30,000. Since we are suitably cashed up I think we can carry on buying 250 shares a week once the Coppock indicator starts to climb again.

The next Coppock buy is in June 2016. This time we make 20 months worth of purchases or 80 x 250 = 20,000 shares. Our average purchase price is $5.25 so we have invested $105,000. Our sale price is $11.56 so we realise 20,000 x $11.56 = $231,200. Our profit is $$126,000.

We start investing again in August 2019. We invest for eight months so 32 x 250 x $14.60 for an investment of $116,800. Now there is a question mark over when we sell. The month end price in the month when Coppock turned down was $6.26 because of the spectacular stock market collapse triggered by Covid so we would realise $50,080 for a loss of $66,720. Based on this our net result to March 2020 would be $126,000 minus $66,000 or minus $60,000 but we haven’t finished yet.

The next Coppock buy signal is November 2020. We invest for 11 months so 44 weeks at an average price of $37.91 so 44 x 250 x 37.91 = $417010. We sell at $39.91. to realise $439,010. Our profit is $22,000.

Our final result is a profit of $30,000 + $126,000 + $22,000 = $178,000 minus our loss of $60,000 equals $118,000. How much did we put in to do this. If my maths is correct we put in $246,000 to make $118,000 which is not bad. We are currently out waiting to start buying if we are following this strategy.

$-cost averaging beats buying equal numbers of shares

I think we could do better if we redid the whole thing with a S-cost averaging format. Let’s imagine that we invest $1,000 a month or roughly $250 a week (instead of buying 1,000 shares a month). Inevitably the calculations become more complicated but let us look at the first investing period and use the price which prevailed at the end of the month.

We invest a little less, $34,000 instead of $38,000. The sale proceeds are $78,000 and our profit is $44,000 instead of $30,000. Another thing that would make a difference is if when Covid struck we closed our position on the trend line break, dead cross moving average sell signal which was clear, explosive and associated with an unmistakable black swan event. This would have doubled our sale price to $12 or more while $-cost averaging would probably have kept our average buying price low enough to make a profit.

In this event we would have made a profit from all four trading periods to date and be waiting to start the whole process again some time early next year when I anticipate Covid turning higher.

Tweaking the $-cost averaging strategy

Looking at the chart there is yet a further strategy that makes sense which is to sell everything on the Covid sell signal/ clear sell signal from my indicators and then start the next $-cost averaging programme immediately.

How would this be working if we had started investing $250 a week in SOXL in September 2021. We would be down heavily because we would have invested $15,000 to buy 827 shares at an average cost of around $18 v a current price of $10.65 but every month now the average cost will be dropping and we will be getting closer to that Covid turning point which should take us rapidly into dramatic profits.

I could go on doing sums forever but the beauty of this strategy is that we have been building a position since September 2021 out of profits. Remember we made $44,000 from the first trading period alone.

Strategy

I have been comparing this with what I am actually doing with SOXL. I started buying close to the peak and my average cost is around $18, very similar to what would have happened if I had been buying them all the way down which to an extent I have been.

The cool thing is that if you haven’t been doing this but start now your average entry cost will be $10.65. I just can’t believe that if you do start now with a S-cost averaging programme you are not going to come out of this with substantial gains and that is real folding money that you can spend.

So just to recap. What should you/ I do. Choose a monthly amount that you want to invest. Divide by four and invest that every month in one of these leveraged ETFs – SPXL (tracks the S&P 500), QQQ3 (tracks the Nasdaq 100), TECL (tracks a basket of technology shares), SOXL (tracks a basket of semiconductor shares).

These are all very volatile and basically the excitement level rises as you move from SPXL (least volatile) to SOXL (most volatile). Whichever one you choose it will be a thrill ride and if you just stick to the programme, investing $1000 or whatever in four tranches every month, you should end up with a substantial profit when the next Coppock sell signal comes along.

Warning: the past is no guide to the future but this looks a good bet to me.

It has occurred to me that I have now stood the Coppock strategy as devised by founder, Edwin Coppock, on its head. He only considered buy signals. In this strategy the only signals that matter are the sell signals. We use these to close our entire position, hopefully banking a profit, and then start again with our $-cost averaging investments and we repeat this ad infinitum.

After a while we should be funding the whole operation from past profits and investors who start now are starting at a favourable moment after a severe bear market and with Coppock already negative.

Yet another strategy – sell, wait, buy (a variant on the first)

There is another strategy which you could adopt which ties in neatly with where the stock market is now.

Number one – we look to sell every time Coppock turns down. If the shares are strong when this happens we wait for my other indicators (dead cross and broken uptrend line) before selling.

Number two – we bank any profits we have made and await developments while Coppock is falling

Number three – we start buying when Coppock reverses direction and starts to head higher or when it becomes negative.

I like this as a strategy because it means we periodically go 100pc liquid and bank our profits and we only start buying when the shares are extended on the downside. For example, SOXL, has not yet turned higher but it crossed into negative around July so we have been buying weekly tranches of the shares for around six months and will already have built a decent holding. Our average entry price will be around $12.5, which is close to the current price.

If the shares break down again we keep buying so our average price keeps falling. If they head higher we will have a confirmed golden cross on the moving averages and by early next year the Coppock line should be rising so we should be starting to rack up handsome profits while still continuing with our buying programme.

The key to the success of this strategy and of any strategy that we may adopt is the going liquid bit because that is how you beat buy and hold. In this strategy we went liquid somewhere between $40 and $70 ($40 is where Coppock turned down, $55 is where the uptrend line was subsequently broken and $45 is where we had a dead cross on the moving averages).

This enabled us to bank substantial profits and we are now rebuilding our holding at much lower prices.

How much to invest

It is tempting since this is an unproven strategy to invest only small amounts to try it out. The problem is that these opportunities to buy when the Coppock indicator is negative don’t come along very often. If you miss this one it could be a long wait for the next one. This argues for making a more significant investment at what history suggests should be a favourable moment.

The last time Coppock was negative was May 2019, before that April 2016 and before that June 2012. All of those were good times to buy. In the last 12 years Coppock has been negative four times or once every three years on average.

Up and down around a rising trend

We are trying to get into a good rhythm here, buying when share prices are extended on the downside and selling when they are extended on the upside. It is simple, appeals to common sense, probably is not as easy as it looks because nothing is in investment but still looks doable if we are disciplined and patient.

History repeats itself

If the strategies discussed above work we stand to make considerable amounts of money so it makes sense to look at the underlying assumptions. First we have an opportunity here of a type which has only existed in the recent past because before that there were no leveraged, rebalanced daily ETFs in which you could invest. These super volatile investments are a new invention.

Second is the idea that history repeats itself. The particular idea here is that the stock market follows an endless cycle of ups and downs, ideally around a strongly rising trend. The very long-term chart of the S&P 500 index, shown below, suggests that this is a reasonable assumption, especially for US shares.

Edwin Coppock has devised an indicator which swings up and down around this rising trend as share prices gain and lose momentum. It may not be perfect but we can use it to build positions in these highly leveraged ETFs when they are extended on the downside and to go 100pc liquid when they are extended on the upside.

It sounds like a strategy that should work and history suggests that it does. Now my idea is that we try it in real time and see what happens. I cannot promise that you will make big gains but it looks like a good bet., maybe even a jolly good bet as Jeeves or somebody like that might have said. So here we go QV subscribers. It is time to synchronise watches, check our weapons and launch our mission.

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