How to Make Quick Money in a Down Market
Until recently, the most popular way to profit from a falling market was to short-sell individual stocks or purchase put options on stocks or major market ETFs. Both short selling and option trading have high trading costs that reduce the profit potential for smaller trades. New products on the market allow traders to take advantage of down trends in various markets at a lower cost.
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Instructions
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Understand that the products that allow you to profit when markets go down are inverse and leveraged inverse exchange-traded funds. An inverse ETF is designed to move in the opposite direction in the same percentage as its target index. The inverse fund for the S&P 500 is the ProShares Short S&P 500 Fund, symbol SH. If the S&P 500 goes down 2 percent during the trading day, SH will go up 2 percent. The reverse is also true. Leveraged inverse ETFs move in the opposite direction of the target index by 200 percent of the daily index move.
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Use the websites linked in Resources to make a list of the different inverse ETFs and the market indexes they mirror. Leveraged ETFs that have "long" in their names will move in the same direction as the index, while those with "short," "inverse" or "bearish" are the inverse ones that will profit when the market is going down. Make a list of the inverse ETFs and the indexes they mirror.
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Determine which market sectors you believe will be declining and select the appropriate inverse ETF. Enter a buy order for the number of shares of the inverse ETF you have selected. Your ETF position will increase in value as the targeted market index declines.
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Set a stop-loss order at a price 5 to 10 percent below your purchase price. This will sell out your position when a small loss of the market goes in the opposite direction of your expectations.
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Close out your position when you believe believe the target index has stopped declining and the profit in your position is maximized. It is important to close out leveraged ETF positions before the end of the trading day. Market conditions could change significantly before it opens again, and you would have no way to close the trade.
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Tips & Warnings
Learning some technical analysis strategies will improve you chances of trading profits. Remember to include the commissions to buy and sell in your profit calculations.
Trading inverse and leveraged ETFs can result in large losses if the market goes against your position. As of July 29, 2009, "pattern day traders," as defined by the SEC, are required to maintain a minimum equity position of $25,000 in their brokerage accounts.
