Leverage cross-rebalancing: 3× on drops, 2× on breakouts, 1× when overheated

Community posts describe this method in two ways. One says "buy TQQQ on the drop, sell it on the way up and buy QLD". The other says "sell QLD on the way up, hold the cash, and add TQQQ on the drop". Both describe the same strategy in a different order. This article is the operator's own rewrite of the strategy's structure and risks, based on a community answer by Gyuni.

The strategy

• When the market drops hard, buy TQQQ (3×) in steps.
• When QQQ breaks its prior high, sell all TQQQ and buy QLD (2×). Holding 3× for a long time makes volatility decay worse, so leverage steps down.
• When a pre-set signal such as RSI overheating arrives, trim QLD and buy QQQ (1×).
• On the next drop, start over from the top.

Leverage goes up at only one moment, after a big drop, and comes down at two: the prior-high breakout and overheating. So most of the time leverage is low, and 3× is held only briefly. That is the biggest difference from holding TQQQ all the time.

Why it is hard

The rule only works if you judge whether this is a big drop and whether the market is overheated. That means it contains a forecast of where the market is. During a drop you cannot buy because it looks like it will fall further, and during a rise you cannot trim because it looks like it will rise further. That is the human default (Investor psychology). The rule looks simple, but it is hard to keep in practice.

Numeric rules

Here is a simple example. The yardstick is the QQQ (1×) price, not the 3× ETF.

• When QQQ is 10% below its high, buy TQQQ with 10% of your cash. At 20% down use 20%, at 30% down 30%, and at 40% down 40%.
• When QQQ breaks its prior high, sell all TQQQ and buy QLD.
• When a pre-set signal such as RSI overheating arrives, trim QLD and buy QQQ.

The numbers are only an example. The point is to set in numbers, in advance, when you buy, when you switch and when you trim. An eye for whether price is near the top or the bottom of its channel helps. If that is hard, write numeric rules and follow them as written (Plan before entry).

Allocation

This is what the original stressed most. Running all of your capital this way is very hard. The base is an S&P 500 or Nasdaq 1× ETF at the core, with this rule used only for the portion aimed at extra return. Apply a rule that contains a forecast to everything, and one wrong call shakes everything (Asset allocation).

Related concepts and search terms

This rule also goes by a community name, but each part belongs to a known idea.

• Dynamic leverage, tactical asset allocation: the whole family of methods that change weights or leverage with market conditions. This is the parent concept, and moving between 3×, 2× and 1× by regime is one form of it.
• Scaling in, averaging down: buying in steps depending on how far the market has fallen. This article's drawdown ladder is this.
• Volatility targeting: lower leverage when volatility rises and raise it when volatility falls. It points the same way as going to 1× when overheated, but the yardstick is volatility, not RSI.
• Risk parity, HFEA: the best-known leveraged strategy in the Bogleheads community, which mixes 3× stocks (UPRO) with 3× long-term Treasuries (TMF) to spread volatility. It differs from this rule in that it handles risk through the asset mix instead of changing leverage (original Bogleheads thread).
• CPPI (constant proportion portfolio insurance): add more of the risky asset as the cushion above a loss floor grows. That is the opposite direction from this rule, which lowers leverage as the market rises (Wikipedia).
• Volatility decay: the loss of value a leveraged ETF suffers from repeated ups and downs when held for a long time. It is the term that explains why this rule holds 3× only briefly.

Search terms: dynamic leverage, tactical asset allocation, scaling in, volatility targeting, HFEA, leveraged ETF decay, 무한매수법, 밸류 리밸런싱.

How it differs from similar methods

The "James Lee" method (a YouTuber). It is known for keeping a 1× index ETF as the base position and adding 2× and 3× positions as the index falls. The skeleton, raising leverage as the market falls, is the same as this article's rule. The difference is how you get out. This rule also sets in numbers when to step 3× down to 2× on a prior-high breakout and 2× down to 1× when overheated, and then repeats that cycle. If only the way up is defined and the way down is loose, you end up holding 3× for a long time during the recovery.

The casino Martingale. After every loss, you bet double the previous stake. The drawdown ladder (10% at -10%, 20% at -20%, 30% at -30%, 40% at -40%) looks similar because it buys more the further the market falls. But the premise is different. In Martingale every round is independent and the expected value is negative, so a long losing streak runs into the table limit or your bankroll first, and one loss wipes out all the earlier gains. This rule rests on the premise that a broad index eventually gets back to its prior high, and it sets the end of the ladder (the cash limit) in advance. The resemblance is in the shape. The difference is in the premise and the limit. Still, in a long slump where that premise fails, this rule shows the same weakness as Martingale, because there is no rule below the last rung of the ladder.

Drawbacks and risks

• In a correction that never reaches the first rung (-10% in the example), nothing happens. If the market rises in the meantime, this portion stays in cash or 1×.
• There is no rule below the last rung. If the market falls past -40%, the 3× ETF is left down far more than that.
• A prior-high breakout can take years. That means holding 3× the whole time, and in a sideways market only volatility decay piles up.
• Overheating measures (RSI, the top of a channel and so on) give different values depending on the indicator and how it is calculated. In a rally to new highs the overheated state lasts a long time, so you end up trimming early.
• Every switch triggers capital gains tax. The more often you trade, the more tax cuts into the return.