The overall market has seen a major trend change in the past 5 months. In February we saw a huge retracement in a very short period of time. Ever since then we have been slowly fading off the recent all time highs made in January. On Wednesday we traded TVIX, an inverse ETF with the overall market, to capitalize on the weakness in the SPY. This is a tricky instrument to trade, so I made a video going over how I traded it on Wednesday to show you what you need to do to profit from it.
Here is video going over our recent trade on TVIX and some tips for trading trend reversals in the over all market:
Knowing When To Trade TVIX
TVIX is an ETF with huge range and great liquidity when the overall market gets weak. It is a great instrument to trade during periods of high market volatility. You can see on its daily chart how much volume and range comes into it on days when the SPY is tanking:
You can see the correlation between the two ETF’s. You can notice that the TVIX only gets range and volume coming into it on days where the overall market is having a big down or up day. This means you only want to be trading it when there is an obvious trend in the overall market, otherwise there is no edge.
The correlation is not exact. The SPY going down does not guarantee TVIX will go up every time. TVIX is also a leveraged ETF. This means that the SPY tanking 1% would probably result in a 5% increase in TVIX. You MUST manage your risk even more aggressively when trading this.
Size Proportionally
When you are trading these stocks with this kind of range, you need to give yourself a looser stop loss, which means buying less shares. TVIX can rip 5 points in 20 minutes, but it can also dump just as fast. If you are trading too much size on TVIX, you will see some wild PNL swings that will definitely make you emotional. Check out the intraday chart below of TVIX from Wednesday to get an idea:
I made the mistake of keeping too tight of stop loss while trading this. You can miss big moves by keeping a stop loss too tight on large range instruments like TVIX. Never put your stop loss on exact support levels, or right on half and whole dollar marks. Give one candle’s worth.
Do Not Hold For Long Periods of Time
My rule for trading TVIX is to never hold it overnight. You can see on its daily chart above what usually happens after it has one or two big up days. It can gap up or down huge pre market, and it usually never holds its gains for an extended period of time. It has been in a non-stop downtrend for the past several years, since the overall market has been in a strong uptrend. It is best to just trade TVIX for day trades only.
Don’t Chase Strength in ETF’s
You should never be chasing stocks, but especially with ETF’s with a range like TVIX. You can see on its intraday chart above how quickly it can reverse on you to either direction. Always wait for a pullback or consolidation for a bit of time before entering. Stocks get their power from consolidations and bases. You are much more likely to get an entry before a big move if you are patient, and wait for the stock to come to you.
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