Thursday, November 17, 2005

Day Trading ETF's

Day trading limits the potential return on any given trade, but it certainly has some advantages. I spent several years purely day trading, wanting to go home in cash every night. It allowed me to wake up with a carefree attitude and no market bias. Watching the futures leaning one way or the other in the pre-market had no effect on me. Naturally, I could trade the market in whichever direction it moved on a given day. But during the past few years, market ranges have contracted, leaving fewer opportunities for a day trading strategy, while opening the door for swing trading larger moves over the course of several days.

I still like being able to day trade when I find good opportunities, though. This year, the bulk of my day trading has been in ETF’s. These exchange traded funds (ETF) trade like stocks, with several of them tracking indexes and a number of them serving as baskets for individual market sectors. The one I prefer to day trade most often is IWM. IWM is the Russell 2000 tracking stock, and of the 3 most liquid ETF’s (QQQQ, SPY, IWM), IWM has the largest average true range. Average true range measures how much a stock moves each day, so IWM is the best moving market index ETF to trade. IWM has had average volume of over 32 million shares per day the past several weeks. This is more liquid than DELL, making it very easy to get into and out of with very minimal slippage. The high volume also allows for large positions.

Trading IWM can be done through the American Stock Exchange, but I find that execution on ECN’s such as ARCA or INET is instant, making the ECN’s my preferred trade route. ETF’s allow for short selling on a downtick, which makes them prime candidates when looking for a way to catch a market move to the downside. While I don’t mind trading the long side, I do also like the ability to hedge long positions almost instantly by shorting IWM, being that it is tied to a major market index.

If you’re a day trader who usually just trades whatever is in play for the day, you might consider adding ETF’s like IWM to your trading list. You can jump in and out or reverse your position very quickly with the high-volume ETF’s, and they really are an easy way to trade the market indexes. IWM offers the most bang for the buck, and day trading it is a great way to quickly get long or short in a liquid trading vehicle that offers plenty of movement.

Jeff White


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