Should I Day-Trade ETFs? Probably Not.

The great majority of ETFs are not designed for day-trading. I like to use them for longer-term trades (months to years), especially ones that pay monthly distributions.

There are some leveraged ETFs that I’ve used for shorter term trades (hours to days). I still don’t view these as specific day trades, which I define as trades that are never held from session to session; for example, the NYSE closes at 3 pm CDT, so all positions must be closed before that time.

For example, you could use SPXL and SPXS to trade the S&P 500. These ETFs are leveraged 3X the overall market. For example, if the S&P 500 increases by 1 point, SPXL should increase by 3 points. Generally, these two ETFs track the market very well.

There are other leveraged ETFs for almost any asset class; for example, OILU for a bullish 3X Crude Oil trade.

If I’m going to actually day-trade an asset, I’ll trade the futures market, which is highly leveraged and highly volatile. I would not suggest you trade in this market unless you’ve gotten some professional training first. It’s very easy to lose a lot of money in a very short time if you don’t know what you’re doing.

My best gains have come from looking at longer-term trading, such as days to weeks or months. For example, I recently traded CAT, buying at 115 and selling at 128 for an 11.3 percent gain. I was in the trade for three weeks.

I also did a recent trade in energy, using the following ETFs: ACES, FENY, TAN, XES, and XOP. I invested $5,000 in each one and used trailing stops to manage my risk. I was eventually stopped out between 2 and 4 weeks in each position for a total profit of $1,345. While that may seem small at only 5.3%, if you do that once a month, you’ve made a 60 percent gain.

I use two methods to gauge where and when I’ll enter a trade: 13–34 Moving Average crossovers and Fibonacci Retracements and Extensions. (Google these terms for in-depth coverage, or watch the following two videos for an introduction:

Be careful. Learn all you can. Practice with “fake” money before you invest. Have a plan and stick to it. Learn risk management. Use stops. Always. Have fun.

Happy investing.