FNGU Deep Dive Part 3 of 3
Using moving averages to generate returns while reducing drawdowns
We checked that the returns provided by FNGU over various periods in time are higher than what the market provides. I covered this in FNGU deep dive Part 1. We also saw that FNGU does have huge drawdowns which can be very detrimental to portfolios. I covered this in FNGU deep dive Part 2.
In this note I talk about a strategy that one can adopt to generate most of the returns while reducing the drawdowns. This strategy has several variations. I will go over the one I follow based on my research and back testing.
Look at the following trades on FNGU this year to date:
These are all based on FNGU 10-day moving average crossing over or below the 20-day moving average. The first bought price is because at the start of the year the FNGU 10-day moving average was above the 20-day moving average. All the other trades are based on sell when FNGU 10-day moving average crosses below the 20-day moving average and buy when the FNGU 10-day moving average crosses over the 20-day moving average.
The last trade is not closed yet and the “price sold” reflects the current price at time of writing.
The total gains with this system YTD is +44.41%. In comparison FNGU is up +53.36% for the year. So the returns with using my simple system is certainly lower than the net returns of FNGU.
However, FNGU has had 5 drawdowns this year so far with the largest drawdown being -42.82%. Using my simple system there were only 2 drawdowns and the largest drawdown is -10.99%
To be sure there are other variations to the strategy. One can just look at actual price vs. the 10-day moving average and use the same system. Buy when price is above 10-day moving average and sell when price is below 10-day moving average. I have tried this and feel it is a less definitive system than the one I use.
Depending on one’s time horizon, one could go longer and use the 50-day moving average. However, while using 50-day moving average may be good for some stocks and other instruments, FNGU is 3x leveraged and thus has higher volatility. I would not recommend long term players to use FNGU.