Thoughts on FAZ and FAS

Ok, a couple of days ago someone on twitter posted a link to a group discussion originated on Google Finance about a guy who lost something like 60k in 2 weeks on FAZ. As astonished as I was, I could not believe the amount of replies he received from people who were in the SAME boat! I was shocked! Flabbergasted! Floored! Even funnier were the advice some people were giving like "Sell everything and switch to FAS", or "Hold - it will get back to 100 in a week"

In my opinion, especially in this volatile market, FAZ (et al, the usual suspects: SRS, FAS, TZA, etc.) should be bought and sold PURELY on a day trading basis - NO overnights! The headline risk is WAAAY too risky for these things. FAZ was down 45% on Monday - 45 Freakin %!!! Down from 120 to 19 in 2 Weeks!! If anyone wants to gamble, then they should go to Vegas where they might get better odds on Black Jack or Roulette.

Even buying these things for day trading poses a lot of risk, as do many other investment vehicles. But one MUST know what their risk is BEFORE putting on a trade. Every buy order should be accompanied by a STOP order that is not too close or you'll risk getting stopped out very easily. Therefore, the amount of shares bought should be dependent on HOW MUCH one is willing to LOSE! I believe many traders think "how much money I want to make" before they put on a trade, when the thinking should be "how much money can I AFFORD to lose if this trade goes against me".

I strongly believe that finding entry points (buy or sell signals) is only a small part of trading. An even more important part is Money Management and when to sell/take profits. A stop loss ensures your survival! Capital preservation ensures you live to fight (trade) another day. It amazes me how often emotions take over when a trade goes against a trader and then they become emotionally attached to the position. If the trade goes against you, sell it! Admit you were wrong and move on! If for any reason it comes back, then buy it again! How hard can it be!

In addition, many traders buy more when the price goes against them. In my opinion, one should NOT average down - you can do that if you are Warren Buffet. But if you depend on trading for a living - then I believe it is the wrong thing to do in the long run. It may work today or tomorrow - but over time, it is a losing strategy. It is amazing how liberating it can be to actually sell a losing position.

So, please consider the risks of trading these extremely volatile ETFs FAZ and FAS, know the risks they pose to your portfolio (not to mention your health), and always have a plan of how much is at risk and when to take profits.

Good luck with your trading!