day trading etfs

ETF Trading Strategies – How to Day Trade ETFs

In this article, we’re going to talk 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 way to generate profits constantly from the financial markets.

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ETFs are versatile financial instruments that are suitable for every trading style from day trading ETF to swing trading ETF. By taking care of the risk associated with ETF trading you can start to enjoy some of the benefits.

We’re going to highlight the benefits of adding ETFs in your trading and investing portfolio. However, we’re also going to shed some light on the risk involved with ETF exchange traded funds.

If you’re not familiar with what is ETF trading and don’t have a complete understanding on how to trade ETFs, we hope this ETF step-by-step guide to shed some light.

What is ETF Trading?

ETF exchange traded funds are financial instruments designed to follow the price of a specific basket of assets and are traded on the US stock exchanges. ETF trading works exactly like stock trading.

ETF brings together, in one place, some of the best features provided by mutual funds and stocks. Most ETFs seek to track a benchmark index and trade on exchanges in shares like a stock. ETF are available for every major asset class like equities or stocks, fixed income or bonds, commodities and cash.

For example, the SPDR S&P500 ETF (SPY) is tracking the S&P500 index.

ETFs provides a cheaper alternative to get exposure into a sector that would have otherwise been extremely difficult to trade.

As an example, if trader Joe wants to invest in gold, he has various alternative methods. Joe can buy gold bullion bars or a gold coin or trade gold futures contracts. However, these are difficult methods, time-consuming and expensive ways to purchase gold.

The cheapest option Joe has, 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.

If you believe the entire stock market will go up you can buy a stock index like the Dow Jones. You can either buy all the 30 companies that make up the Dow Jones index or to buy DJIA futures contracts, which is really expensive.

If you want to do this at a fraction of the price, you can simply buy shares of an ETF that follows Do w Jones like the DIA ETF.

Due to the volatile nature of ETFs, they are the perfect candidate for day trading. Moving forward, we want to teach how day trading ETF works.

Day Trading ETFs

Day trading is among the best ETF trading strategies because this environment is characterized by high volatility. This means that you have the ability to buy and sell ETFs any time throughout the trading day. There are many ETF exchange traded funds, but the best ETF to day trade are:

  • SPDR S&P 500 (SPY)
  • Gold Miners ETF (GDX)
  • ProShares VIX Short-Term Futures ETF
  • 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 US.

An ETF exchange traded funds can provide you with very lucrative short-term opportunities. However, the odds of making any money by gambling on day trading ETFs are very low. That’s the reason why you need to play the game by a few rules.

Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules on how to trade ETFs.

For this article, we’re going to look at how to buy ETFs.

Step #1: Choose the Right ETF Exchange Traded Funds to Day Trade

SPY ETF or SPDR S&P 500 ETF is the most popular and the first ETF Exchange Traded Funds listed in the US. We like day trading SPY because it ranks for largest AUM  and it has the largest trading volume. SPY ETF tracks the performance of the most popular stock index in the world, S&P 500.

How to Trade ETFs

Source: Forbes

These are reasons enough for us to pick SPY ETF as the right candidate for our day trading ETF strategy.

Don’t presume that all exchange traded funds are the same, because they are not. If you aren’t sure which one to trade just go with the most trusted ETF which is the SPY ETF.

Moving forward, we’re going to reveal what day trading rules you need to implement to successfully trade the SPY.

Step #2: Apply the 50 – period Moving Average on the 15-Minute Chart

The 50 – period 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 the market sentiment.

Because many traders use the 50 moving average it has more relevance to the price action. This is the reason why we use the 50 MA in combination with the opening trading range.

etf trading strategies

Now let’s see how we combine the 50 MA with the opening trading range.

See below:

Step #3: Only Enter Trades after 10:00 AM ET

We like to focus on the opening trading range when day trading ETFs. The morning session is when the smart money usually steps in the market and subsequently the most volume happens during the morning session.

By focusing only on the morning session we avoid being glued to the chart all day long and only trade alongside the institutional money.

The regular trading hours for the SPDR S&P 500 trust starts at 9:30 AM ET. But, we like the first 30 minutes after the open, to wait and see what the smart money are doing.

Successful day trading leveraged ETFs is all about taking those opportunities during the most volatile time of the trading day.

Step #4: Price Needs to Hold Above 50-MA and to Open in the Upper Part of the Previous 5 Day Trading Range

After we analyze how the market plays out during the first 30 minutes of the opening session, we look for the price to hold above the key 50 moving average.

Secondly, the SPDR S&P 500 ETF also needs to open in the upper part 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 six day we open near the highest price and we hold above 50 MA we’re good to buy SPY.

day trading etfs

This brings us to the next important thing that we need to establish when day trading ETFs, which is where to place our protective stop loss.

See below:

Step #5: Hide SL $0.25 below the 50 Moving Average

With this mechanical day trading strategy we place our stop loss $0.25 below the 50 moving average. If after the open SPY breaks below the 50 MA it signals that the bulls are very weak. We found this technical reading to be very significant for day trading.

How to Trade ETFs

Last but not least, we also need to define where we take profits.

See below:

Step #6: Take Profit if SPY Advances $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 manually.

etf trading strategies

Note** the above was an example of a BUY trade.  Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.

etf exchange traded funds

Conclusion – ETF Exchange Traded Funds

Day trading ETFs provides simple investment opportunities and have a lower operating cost than most of the other financial vehicles. Don’t underestimate the power of trading leveraged ETFs if you want to take advantage of the intraday volatility.

At Trading Strategy Guides we focus on technical analysis. We love technical analysis because it’s what has worked for us in our own trading for many years. And, it has also worked for many other professional traders. This is he reason why we have developed ETF trading strategies through the eyes of technical analysis.

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etf trading guide