Q: In your books you recommend the use of a 25% trailing stop. Does it stay the same for high-leveraged ETFs (e.g., 3X)?
A: Van recommends the 25% trailing stop as a sort of “last resort” for investors who may not be familiar with stops. If people have nothing beter off of which to base an initial stop (like a swing low or volatility multiple) or they have no effective method to move up their stop as the price moves up, then at least they can use a 25% initial and trailing stop. It keeps these people from losing a great deal of their position and equity.
Leveraged ETFs were designed for, and are best suited for, short term trading. As they are engineered to multiply their underlying index’s daily movements, they will not move in unison with the underlying instrument over weeks or months. In other words, you can lose money buying and holding a leveraged ETF, even if the underlying index is higher than where you entered the position. The same can be said for leveraged inverse ETFs.
Leveraged ETFs make great short term trading vehicles (perhaps even only intraday trading vehicles) which suggests that some type of exit other than a 25% trailing stop would work more effectively.
