How to Day Trade ETFs

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A man looks at a financial graph on his laptop.
A man looks at a financial graph on his laptop. (Image: AndreyPopov/iStock/Getty Images)

An exchange-traded fund, or ETF, is a portfolio of assets you trade as a unit on a stock exchange. The assets can be stocks, bonds, commodities or other financial instruments. You can buy and sell ETF shares rapidly throughout the day, unlike trading a mutual fund -- a transaction you can do only after the market closes for the day. ETFs are less risky than individual assets because of diversification. However, leveraged ETFs can be very risky.

Getting Started

You'll have to open a brokerage account and fund it before you can start day trading ETFs. Once the broker sets you up, you buy and sell ETF shares using the brokerage's online trading screens. As a day trader, you expect to enter and exit positions quickly and to own no shares when the closing bell rings. You can use any number of strategies to guide your day trading. These include trading based on breaking news events or because you expect market prices to move quickly for fundamental or technical reasons.

Margin Requirements

Margin is money a broker lends you to buy stock. The stock and cash in your account secure the margin loan. Regulation T requires that you deposit at least 50 percent of the cash needed to trade on margin. If you are a pattern day trader, you must have at least $25,000 in cash and securities in your margin account. A pattern day trader trades four or more times in five business days, and the day trading must represents at least 6 percent of your total trading activity. The rules limit the total amount you can day trade based on your account value in excess of your margin requirement. Additional rules govern holding periods and margin calls.

Using Stops

You can trade with stops to protect your positions should the market go against you. As a day trader, you have less tolerance for losses, because you don't benefit from long-term trends that can allow investors to recoup losses. A stop loss is a trading instruction that tells your broker to close your position when your ETF trades loses a certain amount of value. You set the maximum amount of loss you'll accept, either as a fixed dollar amount or as a percentage loss, when you place your ETF trade.

Leveraged ETFs

Day traders often use leveraged ETFs in an attempt to magnify their gains. A leveraged ETF offers a return double or triple of that provided by an unleveraged ETF. The downside is that leveraged ETFs also magnify your risk. For example, a 10 percent loss in an unleveraged ETF equals a 30 percent loss in a 3X leveraged ETF. Inverse ETFs move in the opposite direction from regular ETFs, offering a convenient way to bet on market declines. Inverse ETFs can also be leveraged, creating a distinctive set of opportunities and risks.

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