The Leveraged Inefficiency in Trending & Choppy Markets

Abstract

The principal target of this article is to define, initially, a new trading methodology based on the innovative term “Leveraged Inefficiency”, and then to discuss the dimensions, functionalities, and trading returns of this inefficiency (market anomaly). In trading strategies the temporal (time-series) volatility is not well defined as far as the leverage instruments (like 3x ETFs) is concern. The proposed term could be characterized as a concept described by a 3-d array with a number of trading functionalities, because it uses (in market Entry and market Exit tactics) as its third temporal dimension the Jesse Livermore’s “Psychological Time” and the well-known in trading “Emotional Control” and the “Money Risk Management” as the other two dimensions. After back-testing the proposed trading methodology in available 3-year data for the JDST leveraged ETF (gold miners juniors), we found that in choppy markets, overnight-position institutions profit from the proposed “Leveraged Inefficiency” at the expense of long-term investors, and swing  traders as well. Similarly, in trending markets, day-trading speculators profit from the proposed “Leveraged Inefficiency” at the expense of hedge-funds. Hence, the presented research shows that the proposed “Leveraged Inefficiency” market anomaly accumulates profit entirely overnight in choppy markets, while in a trending market the profit occurs mainly intraday.