How to Inverse ETFs for Day Trading
Inverse exchange traded funds--ETFs--allow day traders to make profits when the major market indexes and major-index-linked ETFs are falling in value. The day trader does not have to "inverse" an ETF but, instead, must find the appropriate ETF to use to trade against a specific index or market sector.
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Instructions
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Develop a trading strategy and technical analysis indicators to determine when the major market indexes will decline for day trading purposes. Day traders open and close their trading positions within the trading day and have their entire account in cash by the end of the market day.
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Open a margin account with an online stockbroker if you do not already have one. Day trading rules require a minimum of $25,000 of trader equity in any account designated as a pattern day trading account. The Barron's 2010 Broker Survey rates MB Trading and Lightspeed Trading as the best brokers for frequent traders.
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Select the inverse ETFs that provide the opposite price movement to the stock index or indexes you are tracking. Here is a list of popular stock indexes and the symbols for the corresponding inverse ETF:
S&P 500: ProShares Short S&P 500, symbol: SH.
Dow Jones Industrial Average; ProShares Short Dow, symbol DOG.
Nasdaq 100: ProShares Short QQQ, symbol PSQ.
MSCI Emerging Market Index: ProShares Short MSCI Emerging Markets, EUM.The ETF databases at the Index Universe and ETFdb websites can help you screen for more inverse ETFs.
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Trade the selected inverse ETFs on the days when the corresponding stock index is declining. The inverse ETFs are designed to provide the inverse return of the tracked index. For example, if the S&P 500 declines by 2 percent, the share price for SH will increase by 2 percent.
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Tips & Warnings
Inverse ETFs allow you to profit from a falling market without the need or problems of short selling.
Day trading works on a system of closing all positions to cash by the end of the day. Close out your inverse ETF trades before the market closes. A rise in the stock market the next day could wipe out your profits if you hold an inverse ETF position overnight.
Inverse ETF shares trade the same as any stock or ETF shares.
Day traders use margin accounts to borrow part of the purchase price of their trades. Inverse ETFs are subject to different margin requirements. Check with your broker before trading any inverse ETFs.
Day trading requires the ability to correctly predict the direction of the market and move rapidly in and out of trading positions. Inverse ETFs can lose money as well as make money for traders.
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