Profiting From The TSX Plunge With The HXD, HXU and XIU

On Thursday July 31 2014, I entered the market direction portfolio through the HXD in the early morning. I split the order when selling my shares of HXD into two parts of 1000 shares each. Both were sold out with the last sell taking place right at the close of the day. With a big point drop in a single day, the last thing I want to do is hold an Ultra ETF into the next day as often a bounce can wipe out a lot of profit earned. Instead I prefer to sell out and close the trade. Then I look for another entry point the following day.

The problem for most investors is knowing when to enter a trade in the TSX market direction portfolio and when to exit it. Trading daily in the market direction portfolio can be difficult, but it is the daily trading that can really grow the Market Direction Portfolio. To see what I mean let’s look at the bear market of 2008.

Bear Market Of 2008

Let’s look at this example of trading the TSX lower in the bear market plunge following the collapse of Lehman Brothers on September 15 2008. The red arrows indicate times when trading the HXD should have been done and the green arrows indicate times when the HXU should have been traded. The Blue arrows are times when both HXD and HXU may have worked as the market direction was primarily sideways.

Looking at the chart you can begin to see why so few investors actually ended up buying the HXD let alone trading it. The whipsaws in the market direction on the TSX were enormous. Some days the move was hundreds of points and other days it was weeks of up and then down movements. Navigating through this type of market for profits is extremely difficult.

2008 bear market August 1 2014

The 2008 bear market following the collapse of Lehman Brothers

HXD Trades

During this period, if an investor bought the HXD on the day of the Lehman Brothers Collapse, Sept 15 2008 he would have paid $22.53 at the close. If an investor had held the HXD until Dec 15 2008, he could have sold out for $31.37 for a gain of 39%. Sounds impressive. If I had bought 3000 shares I would have spent $67,590.00. On December 15, 3 months later I would have sold for $94,110.00. My gain would have been $26,520.00. A nice sum indeed.

But Consider Trading the HXD

But instead what about if I have traded within the HXD just 3 times over the same period. The Green letters represent buy periods and the yellow letters, sell periods.

If I have bought HXD shares on September 15 and sold on Oct 10 I would have earned 57% on that trade alone. The Oct 14 to Oct 27 period would have return 69%. The Nov 5 to Nov 20 period would have returned 51%.

$126,600 VS $26,520

If I had bought 3000 shares, I would have earned $38,700 on the first trade, $45,900 on the second trade and $42,000 on the third trade before commissions. This means a total income earned of $126,600.00 rather than the $26,520 from the original trade I outlined above.

While these are just examples, it shows not only the possibilities when trading during periods of high volatility, but it also shows how to truly protect a portfolio. Earning $26,520 in a market collapse such as the fall of 2008 against a portfolio is not going to protect much when the portfolio is already down by 50% in a bear market.

On the other hand, $126,600 will go a long way to protecting a portfolio. As well the first trade alone made enough that the rest of the trades could have been done with the capital earned in the first trade, greatly reducing the risk to the original capital invested.

HXD bear market 2008

HXD during the bear market period of 2008

Imagine what kind of return may be possible if trading this kind of volatile, yo-yo market daily. For example, while the above trades could have been done by investors who were not trading intraday but just checking their positions a few times a day, more active investors who were willing to trade intraday when needed, could use a stop-loss and other methods to earn profits almost daily. These profits would far surpass any of the profits previously discussed.

The rest of this strategy article is for FullyInformed Canada members. It is 3400 words in length and will require 12 pages if printed. This extensive article looks at the methods I use to trade the TSX index plunge in my portfolio using the HXD, HXU and the XIU ETFs. This article is from the Become A Better Investor category.

Profiting From The TSX Plunge Using the HXD, HXU and XIU ETFs

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