ETF Trading Strategy – How to Day Trade ETFs
In this article, we will talk about how ETF trading strategies can help you grow a small account quickly. When combined with the right strategy, ETFs can be one of the best and safest ways to generate consistent profits from the financial markets.
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ETFs are versatile financial instruments suitable for every trading style. This means you can start a day trading ETF or even a swing trading ETF. By taking care of the risks associated with ETF trading, you can start enjoying some of the benefits.
We will highlight the benefits of adding ETFs to your trading and investment portfolio. However, we will also provide some insight into the risks involved with ETFs (exchange traded funds).
If you are not familiar with ETF trading and do not have a complete understanding of how to trade ETFs, we hope this step-by-step ETF guide will provide guidance.
What is ETF Trading?
Exchange-traded funds (ETFs) are financial instruments designed to track the price of a specific basket of assets and are traded on the United States stock exchange. ETF trading works just like stock trading.
ETFs bring together, in one place, some of the best features provided by mutual funds and stocks. Most ETFs seek to track benchmark indexes and exchange-trade stocks like stocks. ETFs are available for every major asset class such as equities or stocks, fixed income or bonds, commodities and cash.
For example, the SPDR S&P500 ETF (SPY) tracks the S&P500 index.
ETFs provide a cheaper alternative to gain exposure to sectors that are inherently very difficult to trade.
For example, if trader Joe wants to invest in gold, he has various alternative methods. Joe can buy gold bars or gold coins or trade gold futures. However, this is a difficult, time-consuming and expensive way to buy gold.
The cheapest option for Joe is to buy shares of a gold ETF like GLD, which follows the market price of gold. Joe can do this at a fraction of the price and with less effort. Learn more about How to Trade Gold here.
If you believe the overall stock market will go up, you can buy a stock index like the Dow Jones. You can buy all 30 companies that make up the Dow Jones Index or buy DJIA futures contracts which can be really expensive.
If you want to do this at a fraction of the price, you can simply buy a stock ETF that tracks the Dow Jones, such as the DIA ETF.
Due to the volatile nature of ETFs, they are perfect candidates for day trading. Moving forward, we want to teach how ETF day trading works.
Day Trading ETFs
Day trading is among the best ETF trading strategies because this environment is characterized by high volatility. This means you have the ability to buy and sell ETFs at any time during the trading day. There are many ETF exchange traded funds, but the best ETFs for day trading are:
- SPDR S&P 500 (SPY)
- Gold Miners ETF (GDX)
- ProShares VIX ETF Short-Term Futures Contract
- ProShares Ultra VIX Short-Term Futures ETF (UVXY)
- iShares MSCI Emerging Markets ETF (EEM)
These are also among the 5 most actively traded ETFs in the United States.
Exchange-traded funds can provide you with very profitable short-term opportunities. However, the chances of making any money by gambling on day trading ETFs are very low. That’s the reason why you need to play a game with some rules.
Now, before we go, we always recommend taking a piece of paper and a pen and pay attention to how to trade ETFs.
For this article, we will look at how to buy ETFs.
Step #1: Choose the Right Exchange Traded ETF Fund for Day Trading
The SPY ETF or SPDR S&P 500 ETF is the most popular and the first Exchange Traded Fund ETF listed in the US. We like SPY day trading because it ranks for the largest AUM and has the largest trading volume. The SPY ETF tracks the performance of the world’s most popular stock index, the S&P 500.
Source: Forbes
This is reason enough for us to choose the SPY ETF as the right candidate for our trading ETF strategy today.
Don’t assume that all exchange traded funds are the same because they are not. If you are not sure which one to trade, you will go with the most reliable ETF which is SPY ETF.
Moving forward, we will reveal what day trading rules you need to execute SPY trading.
Step #2: Apply the 50-period Moving Average on the 15-Minute Chart
The 50-time moving average is one of the most popular indicators in stock trading. The 50 MA is a psychological level that many professional traders and investors use to gauge market sentiment.
Because many traders use a 50 moving average it has more to do with price action. This is the reason why we use the 50 MA in combination with the opening trading range.
Now let’s see how we combine the 50 MA with the opening trading distance.
See below:
Step #3: Only Enter Trades after 10:00 AM ET
We want to focus on the opening trading range when day trading ETFs. The morning session is when the smart money usually moves in the market and hence, the most volume happens in the morning session.
By focusing only on the morning session, we avoid getting stuck on the charts all day and only trading with institutional money.
Regular trading hours for the SPDR S&P 500 trust begin at 9:30 a.m. ET. But, we like the first 30 minutes after open, waiting and seeing what the smart money does.
Successful ETF day trading is all about taking those opportunities during the most volatile trading hours of the trading day.
Step #4: Price Needs to Hold Above the 50-MA and Open at the Top of the Previous 5-Day Trading Range
After we analyze how the market played during the first 30 minutes of the opening session, we look for the price to hold above the key 50 moving average.
Second, the SPDR S&P 500 ETF also needs to open at the top of the previous 5-day trading range. Simply mark on your chart the previous 5 trading days and the highest price of that trading range.
If on the sixth day we open close to the highest price and we hold above the 50 MA we are good to buy SPY.
This brings us to the next important thing we need to determine when day trading ETFs, which is where to place our protective stop.
See below:
Step #5: Hide the SL $0.25 below the 50 Moving Average
With today’s mechanical trading strategy, we placed our stop loss $0.25 below the 50 moving average. If after the SPY opens below the 50 MA, the signal that the bulls are very weak. We find these technical readings very important for day trading.
Finally, we also need to determine where we take profits.
See below:
Step #6: Take Profit if SPY Faces $1.00
This trade setup is based on our experience that if all the above conditions are satisfied, then there is a very high probability for the SPY ETF to rally at least $1. If your profit target is not reached by 4:00 PM ET close the trade automatically manual.
** Note: above is an example of a BUY trade. Use the same rules for SELL trades – but in reverse. In the picture below, you can see an example of a real SELL trade.
Conclusion – ETF Capped Trade Fund
Day trading ETFs provide convenient investment opportunities and have lower operating costs than most other financial vehicles. Don’t underestimate the power of ETF trading if you want to take advantage of intraday volatility.
At Trading Strategy Trader we focus on technical analysis. We love technical analysis because it has worked for us in our many years of trading, and for many other professional traders.
Thank you for reading!