Day Trading ETFs: Step by Step Beginners Guide (2024)

Are ETFs Good for Day Trading?

Besides stocks, ETFs are very popular during day trading. They offer a lot of diversification compared to mutual funds, have high liquidity when trading, and have low costs. They are a good strategy to employ for trading or investing.

Take our free online trading courses to learn how to trade ETFs successfully.

To make a long story short, exchange-traded funds are a basket of securities traded on an exchange. A money management firm buys a group of assets – like stocks or bonds – and then lists the group or “basket” on the market to trade.

Typically, the purchased assets are designed to mimic the performance of an index such as the S&P 500.

Where ETFs shine is their availability; you can get them for every major asset class. For example, equities, stocks, bonds, commodities, and cash can all comprise ETFs. An example is the SPDR S&P 500 ETF ($SPY), which tracks the Index.

Even though an ETF looks slightly like an index mutual fund, it is quite different. At their core, ETFs have two types of shares: Creation units and retail shares.

1. Creation units

Authorized participants such as trading and brokerage firms hold creation units and agree to commit cash to the fund. These “authorized participants” or creation unit holders can exchange their shares for the actual securities held in the fund. Alternatively, they can add the appropriate securities to the fund to make new creation units. The purpose of this is to keep the value of the ETF in line with the underlying market index.

If you’re curious, this is how they do it. When the price of an ETF drops below the value of the different securities, the “authorized participants” will trade in their creation units for the securities. Second, they then sell the securities in the open market.

Alternatively, if the price of the ETF goes above the value of the securities in it, the “authorized participants” will buy more securities. Next, they exchange them for more creation units to sell at a profit.

Provided that only authorized participants can trade creation units, retail shares are what’s left for us.Retail ETF shares are listed on the Exchange to be bought and sold by regular traders/investors like you and me. Hence, you’ll trade the retail shares if you are day trading ETFs.

More often than not, the price of both the creation units and the retail shares will correspond with the cost of the securities. On occasion, though, we see the value of the ETF and its investments going in different directions.

Flexibility. ETFs have a leg up over the competition in that you can buy or sell them any time you want during the trading day, long or short, using cash or margin, all through your regular brokerage account. This flexibility is great for day traders.

Versatility. I especially like that ETF offers a fantastic way for day traders to get exposure to market segments that may otherwise be difficult to trade. Not only are ETFs versatile financial instruments, but they are also suitable for every trading style – day or swingtrading.

Selection. Your options are unlimited, given that ETFs are available on the big market indexes, not to mention domestic bond indexes, international stock indexes, foreign currencies, and commodities.

Customized. Sometimes, traders are interested in a market segment that doesn’t have an index on it. What ends up happening is that somecompanies develop their niche indexes. And, in turn, issue ETFs on them. You can find ETFs for green energyand Islamic investing markets.

Affordable.I like that ETFs provide a cheaper alternative to get exposure to a sector you might otherwise not have access to. Say, for example, that I want to invest in gold. Luckily, I have many options. I am buying gold bullion bars and coins or trading in gold futures contracts. But I don’t have the money. Sigh. What am I to do? Well, my cheapest option is to buy shares of $GLD. $GLD is a gold ETF that follows the market price of gold. What’s nice about $GLD is that it costs me a fraction of the amount of buying bars.

If you think the entire stock market will increase, you can buy a stock index like Dow Jones. For those unfamiliar with the Dow Jones Index, 30 companies make it up. You have three options available.

First, you can buy all 30 companies that comprise the Index. Second, you can buy DJIA futures contracts, which can be expensive. Third, you can buy shares of an ETF that follows Dow Jones, like the DIA ETF, at a fraction of the price.

Day tradingis among one of thebestETF trading strategiesdue to the high volatility environment. And this can provide you with very lucrative short-term opportunities.

High volatility means you can easily buy and sell ETFs anytime during trading. Those of you who’ve traded individual stocks likely found themselves stuck in a situation where you can’t unload shares due to low volatility.

Fortunately, with the right ETF, you won’t be in this situation. Check out our trade room to discuss ETFs with a community.

Trade The SPY ETF. The most trusted ETF is theSPY ETF. It ranks for the largest AUM, has the most substantial trading volume, and tracks the performance of the most popular stock index in the world, the S&P 500.

Only Enter Trades After 10:00 AM EST.Even though some traders like to catch a run out of the gates, I like to let the dust settle. It’s vital to wait and see what the smart money is doing; don’t get caught in a false breakout.

If you place a market order, you tell your broker to buy or sell the stock for you immediately atanyprice. Yes, atanyprice.

Aside from being hasty, if you place a market order, you have no control over the fill price. You get filled on the wrong side of the bid-ask spread. A market order buys at the ask (high side) and sells at the bid (low side).

Unlike a market order, a limit order only fills at the price you want or better. The keyword here is limit; a limit order limits the price you will pay for the stock.

You tell your broker to buy or sell a specific stock at or better than a specified price. The important thing is that you are in control.

Read our post onlimit order vs market order.