How to Day Trade ETFs
Day trading is one of the most risky approaches to trading, but can also be very rewarding. The vast majority of day traders are eventually wiped out and lose everything, though this is less likely when day trading ETFs (Exchange Traded Funds). Day trading is strictly defined by the Securities and Exchange Commission (SEC), who puts specific restrictions and requirements on so-called "pattern day traders" who commit four or more round trips (buys and sells) in a 5-day period. If the day trades are more than 6 percent of their total number of trades during that period, then the trader must maintain an equity (cash and stock) value of at least $25,000.
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Things You'll Need
- Trading account with at least $25,000 Access to real time market data and news
Instructions
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Choose an ETF. It might sound obvious, but before blindly jumping into a trade, it's a good idea to take the time to understand the components of the ETF and its past performance. Many ETFs consist of stocks and, while relatively diversified, might be skewed to one or more stocks in particular. Many also do not necessarily perform according to the marketed specifications. The time to become aware of these possibilities is before entering a trade.
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Study entry strategies. When a position is sold, whether or not it's profitable depends on the price at which the position was entered. Day traders use three main approaches to choosing entry points. Candlestick patterns are used on both daily and intraday time frames to signal technical reversals. Analysis of trendlines and chart patterns, such as Elliott-wave counting, also give traders confidence to enter a trade. Finally, real-world catalysts such as breaking news, often with confirmation of trading volume, inspire day traders to pull the trigger.
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Use stop-loss. No trader is perfect, and everyone experiences some losing trades eventually. The question a day trader must ask themselves is how much they're willing to lose. Either by entering a stop-loss order, or by acting on a mental stop-loss level, day traders will set a level at which they will admit defeat and exit a trade to prevent further loss.
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Use targets. The opposite of the stop-loss is the profit target. A winning trade can become a loser if the profits aren't taken when they're there to be had. Therefore, day traders will set target levels at which they will exit a position, even if the trade continues moving in their direction, to lock in profits. Some traders prefer to scale out of positions by setting multiple target points at which a portion of a position is sold, which can help reduce risk and increase potential profits.
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Tips & Warnings
ETFs are popular as trading vehicles because they are more diversified than individual stocks, yet are also targeted very specifically. However, because they don't tend to be a volatile as individual stocks or options, it's difficult to make huge profits on individual trades without using a large amount of capital. While strict day-trading means entering a position and exiting entirely within a single day (called a "round trip"), the requirements of a pattern day trader can be avoided by holding part of your positions overnight or for several days. No single technical indicator or strategy works 100 percent of the time, so using several strategies to choose only the best risk/reward trades is the best way to limit losses.
As with all investments and trading strategies, day trading involves significant risk of financial loss. If possible, consult a professional before acting.
Resources
- Photo Credit Joseph Nicholson
