This is the third of three great questions posted in the trading room early today from member @sur-non that I figured was worth sharing on the front page of the site. My reply is simply my own opinion based on my experience as an active trader, investor & former stock broker. Opinions on just about any topic, as with this one, will vary and as such, comments, feedback & questions in the comment section below this post are welcomed.
Q: If things play out the way you say they may in your 2/26 review of the SPY and QQQ and previous posts, I am wondering how to make that short bet. […] My understanding is that you use mini futures but with all that leverage some people, without your years of experience, like myself, are intimidated – maybe you can speak to that.
A: While I can’t provide individual investment advice, I can say emphatically that those relatively new to trading or investing should avoid the use of leverage like the plague. That includes buying (or shorting) futures, options (straight call or put buying, not paired trades that limit risk & even then, those are complex strategies that require experience) or using a fair amount of the leverage allowed in a margin account.
2x & 3x leveraged ETFs also have their potential pitfalls (see the ETF subsection of the FAQ page on RSOTC.com) but can be used effectively at times as long as one makes the proper downward adjustment to their position size to account for the 200% or 300% leverage & has an understand of which leverage ETF are prone to high rates of decay when held for extended periods of time & which ones aren’t (as well as the market conditions that account for the decay on leveraged ETFs & those market conditions that actually make the leverage work in your favor vs. against your position).
Bottom line: Practice & hone your skills trading & investing in individual stocks & ETFs (or paper trade) until you’ve found your niche & trading style that works for you. You’ll know when it might be time to start incorporating the use of leverage into your trading or investing & for most, that time will be never as many don’t have the passion, effort & dedication to continually learn & make a strong effort to improve their trading skills. The other hard part, a lesson that I’ve learned the hard way many times in the past & still slip up on sometimes, is to fight the urge to ABT (always-be-trading).
The stock market (minus the pair of 2 year stretches of unusually low volatility & very consistently steady gains in 2013-2014 & 2016-early 2017, at least for buy & hold investors) is not an ATM in which a trader or investor can consistently & reliably extract money from on a daily basis. One must learn when to engage the market long (and short), how aggressively (or not) to engage the market & most importantly IMO, when to stand aside. Over the years, especially in my early year of trading, I’ve found that my biggest winning streaks came in spurts & more often than not, those periods of big gains where nearly immediately followed by periods of my biggest draw-downs or give-back of profits.
Over time, I’ve become much better at knowing when to be long or short as well as HOW long or short to be (i.e.- aggressive, fully long or short; mildly net short or long; hedged with longs & shorts; etc..) and when to stand aside & sit on my hands, patiently awaiting the next objective time to start engaging the markets or a particular stock, sector, commodity, etc..