Scalping 3x leveraged ETF’s might appear as an lucrative alternative to trading futures or volatile stocks. The leveraged ETF’s decay in value over time due to the nightly reset, but the management expenses and fees are not a concern for intra-day trading. The inverse leverage ETF’s are also ample hedges to long-only portfolios during financial events.

The purpose of scalping an ETF is to make profitable bets on the market direction in the very short term. The TQQQ and SQQQ arw referring to the Ultra ProShares ETFs that track the Nasdaq and is used as an example (simply because the four letter abbreviation is easy to remember). They also have substantial volume and since their movements are more amplified than the regular QQQ, they are a popular choice. There are of course other ETF’s dedicated to specific sectors and markets and are probably great alternatives as long as they are liquid.

Is The Winning Probability The Same For TQQQ and SQQQ?

The probability that the Nasdaq will go higher is always greater than the probability that it would go lower. Here’s why:

1. The Nasdaq is a selection of the companies that have to qualify to be included. Companies that are going bankrupt are kicked out and financially healthy companies get to stay.
2. The goal of a company is to produce a profit. There is an organic push to the upside.
3. Most of the time we have inflation in the economy. The face value of assets increase over time.
4. In order to short the market with stocks, you have to pay for borrowing them first. Hence, the market participants working the downside have smaller bets.

This means that the scalping strategy is more favourable to carry out in a rising market with TQQQ than in a falling market with the SQQQ.  (This is my same reasoning for rather going long than short in the market.)

How Do You Pick The Order Entry?

If a controversial FED announcement is coming up, you could buy the SQQQ minutes before the event starts in order to protect your long-only equity portfolio. But what if you want to scalp the TQQQ and SQQQ intraday, back and forth until your fingers are sore and your broker has cashed in enough transaction fees from you to invite you to their Christmas dinner?

I keep hearing about studies that prove that a monkey can easily beat any portfolio manager. So perhaps we should just use a random generator? Similarly, if you believe technical and fundamental analysis of stock price, trading volume and news can not be used to identify trends, then maybe it’s better not to start racking up transaction fees. On the other hand, if you believe you have the ultimate prediction machine, you can automate it, let it run and send me a plane ticket to whatever island you’re on. I’ll buy you a drink.

Removing the gambling nature of intra-day trading is difficult. The only way to do it is to look at probabilities like a card counter. (I explain my reasoning in this article.) Since the probability for an increase in TQQQ is higher than an increase in the SQQQ (as described earlier), we should mainly focus on using it. Logically, the odds for an increase in the TQQQ is higher when the market has opened negatively (especially if it’s the fifth day in a row). So should we always buy the “falling knife” or would it be safer to always play the trend regardless of the direction?

I’ve seen elaborate criterias set up by traders to pinpoint the optimal entry. There are multiple ways to convince yourself of a rational decision and why an exception occurred in the automated fool-proof algo-solution you had in place for this. But one thing to bare in mind is the price fluctuations. Intra-day price fluctuations are guaranteed in the TQQQ and the SQQQ. There is not a single day when the price has only gone in one direction. So the probability of a winning trade is higher if we trade within the fluctuations at a time of the day when the price fluctuates the most. This is where we come back to volume. I mentioned earlier that TQQQ and SQQQ are popular, meaning that we can expect trading volume to increase the frequency of price fluctuations. So when are they traded the most? You can trade them in the pre-market (4.00-9.30 a.m. ET) and also in the after-market (4.00-8.00 p.m. ET), but the most volume is seen during the first half-hour of trading and similarly prior to its close. Of these two it would make sense to use the market opening since these ETF’s are reset at end of day. (If needed, you can keep a trade open the whole day but it is not advisable to keep leveraged ETF’s overnight.)

Before I forget: I think we can all agree to add tight SL (Stop Loss) and TP (Take Profit) orders on top. Most traders would use a ratio of 1:2 or 1:3, meaning if you enter at the price of 1.00, your SL could be for instance 0.95 and your TP 1.10 or 1.15.

In a nutshell, most days a TQQQ scalp is a coin-flip, time waste and a transaction cost for non-technical traders. But definitely an exciting game to play at market open and using the SQQQ as an event hedge is actually quite smart. Do you agree? Let me know what you think on LinkedIn.