1st Trade

The first trade to christen this foray is taken on May 1st of 2012. Note that the post is being made on May 2nd because May 1st was spent getting the blog up and running.

Reasoning - After some good economic reports at 10 am, the market had gone into rally mode. Entry into the trade was based on two main reasons. First, I believed the market movement up to be over zealous and weak since the previous day was a sizeable down day.

Secondly, anything in the low 17s to high 16s seemed like a entry point with favourable odds. This is because the low on TZA was $16.60 on March 27th and the high was 20.7 and 20.5 on April 10th and 23rd respectively. In other words, based on the last month of trading there was more potential for a move up than a move lower from my point of entry. With that said, one should be careful to not discount the effects of decay on price movements since this is a leveraged product (click here for a more detailed explanation).

Overall, the entry was 18 cents off the daily low, which was pretty good given the circumstances and sizeable price drop from market open.

Discussion and Rationale - There was an opportunity to sell at 18.60 to 18.70 on the morning of May 2nd for a return of $1000 or 7% on the account. A good question to ask is, wouldn't a rational decision have been to cash out at that moment? The answer is complex and open to debate (yes). My thought process was that the entry price was good on its own merit. I am anticipating a continued move down on the Russel 2000 (and all indices) into next week and as a result would prefer to have exposure in the event it does happen. With the entry price being good there is a decent cushion of profits to cover in case I am wrong. I will exit at $200 profit no matter what (not withstanding a large overnight move against me). However, when in doubt, the correct decision is to reduce your position size or take profits off the table up to the point where you no longer have emotional residue hindering your decision making process, i.e., your comfort zone. 

Also, note the cup and handle formation setting up on the 5 minute chart above. The handle is in the process of being completed, and the move that comes next is a breakout to the upside with a lot of momentum. See here for more detail on the cup and handle.