Gain insights from a seasoned ex-Wall Street trader with 40 years of experience, as he imparts knowledge on leveraged 3X ETF trading. Explore the intricacies of risks, rewards, and effective strategies.
What Are ETFs?
Exchange-Traded Funds (ETFs) are a simple and effective way to invest in nearly every imaginable market segment, industry, index, or the global stock market.
There is currently a huge variety of ETFs that are designed to track the performance of any of the following:
- A stock market index – The S&P500 (Ticker: SPY)
- A commodity – Gold (Ticker: GLD), Silver (Ticker: AGQ)
- An Industry – Global Telecoms Sector (Ticker: IXP)
- Size of Stocks – Small Cap Value (Ticker: VBR)
- A Country – China Bull (Ticker: YNNN)
- A Currency – British Pound Trust (Ticker: FXB)
- Futures Contracts – Short-Term S&P500 Futures (Ticker: VXX)
ETFs trade like a stock on the open market; this is beneficial as it means a good level of liquidity and lower transaction costs. As with any financial transaction, you need to know the character of the instrument you are using.
ETF Traders vs. Investors
To enter the trading arena, stock market professionals know their game backward and forwards.
In the stock market, two types of clients enter the market daily. The first is the Investors, who usually say they are in it for the “long-term,” then there are the traders who are in the market every day, buying and selling constantly as price gyrates from highs to lows, seeking the quick buck profit.
They are two entirely different beasts altogether.
They pick a potential stock using the fundamental research they have. They make a point of trying to understand fully the business they are investing in. With that, they gain a certain level of understanding and a belief that the business model of the company they are investing in is solid.
They read all the magazines and print to be sure they stay on top of the latest stock news wherever it’s available.
They may even have a technical background, know where their stock is on the chart, and will attempt to buy, accumulate, and hold shares over a long ( 2 -5 Year) time horizon.
Perhaps the more technically savvy and short-term gifted of the two, the professional trader lives in a world where minutes, even seconds, can seem like a lifetime. Usually well-financed, they seek to profit from even the smallest price differences, day trading in and out, sometimes dozens of times a day, bullish one moment, bearish the next, to extrapolate a very quick profit and move on to the next trade.
In some respects, they are highly compulsive, fixated, and perhaps even obsessed with the stock market’s day-to-day, hour-to-hour price movements.
I should know. I am one of them.
I have been living and breathing, trading the market every business day for many years, and working 60-70 hours a week from home in retirement in the mountains of New York. I work with the defined purpose of being right more often than wrong.
I continually update my charts throughout every day on paper with a mechanical pencil, seeking the exact moment when there is a price inflection breakout, and then going fully capitalized to trade the opportunity and get in and get out, with the maximum amount of profit, for the shortest risk time available.
As a trader, I use leveraged 3 X Bull / Bear ETFs to trade the market every day, capitalized, on both the long and short sides of the market, depending on an existing defined trend.
So how does one make money in the market by continually using these leveraged 3 X ETFs? Keep reading to find out.
Why Trade 3X Leveraged ETFs?
The answer to the “Why trade 3X Leveraged ETFs” question is amazingly simple. It’s about the PROFIT POTENTIAL you can make in the quickest amount of time for simply being correct in your market opinion of a stock or index movement.
And rather than waiting days or weeks to be proven correct, in the world of leveraged 3X ETFs, that reward can come in seconds or minutes from purchase.
Think about that for a moment.
And then understand the lure of such investment vehicles is at the tip of your finger every day in the stock market.
How Do Leveraged ETFs Work?
They are what they say they are; a 3X leveraged ETF is a vehicle calibrated to 300% or triple the gain or loss of the price movement of a stock or index.
If the Dow rises 1%, then the 3X Leveraged ETF returns 3 %
But unlike a mutual fund, which rewards an investor with its closing price each day, ETFs can be traded in some instances around the clock, allowing a trader to get in and get out frequently throughout each trading day.
And thus, a trader can reap a substantial return in a very quick amount of time.
That is, as I say, the lure.
However, the lure of such a vehicle comes with substantial RISK. I want to write about those RISKS first, almost as required Disclosure.
The Risks of Leveraged ETFs
The risks of 3X leveraged ETFs can easily exceed the risk tolerance of many traders because returns are magnified by 300%; if one is wrong about the direction of the purchase, the LOSS potential quickly becomes apparent.
Your assumption of a quick in and out gain can suddenly become a very leveraged loss, causing a large potential drawdown in a trader’s account and tying up capital that could be used for other potentially money-making trades.
Thus exact TIMING is CRUCIAL to SUCCESS in the world of leveraged ETF’s trading.
To put it as simply as possible, one must enter a position at the OPTIMUM time and exit the trade in the same way to trade these types of vehicles successfully.
And that is not an easy thing to do.
No matter how gifted you may think you are, the daily price fluctuations in the market itself may cause you to get it EXACTLY WRONG short term. I’m talking about minutes, and because of the 300% movement, the price may immediately reach your STOP, only to see it reverse and soar to the exact place you thought it would go. You are stopped and left staring at the screen, realizing the gain you anticipated happened without participating. I have been there, and there is no worse letdown than that.
Leverage indeed works both ways, and because of that leverage, you are not recommended to hold these 3X ETFs overnight.
The reason is the overnight gaps that frequently happen throughout the trading week.
Say an index opens the day on the NYSE down 1%; if you had held a bullish 3 X ETF overnight, your immediate return on the open would be – 3%. Imagine being down 3% overnight, just for holding position 24 hours.
That is why I recommend that you LIMIT the times you hold a 3X leveraged ETF only when you are almost absolutely certain of continuing a trend the following day.
Position size is crucial to success in trading 3X Leveraged ETFs.
How to Trade Leveraged ETFs Overnight
Trying to get a handle on trading 3X ETFs during regular market trading hours on the New York Stock Exchange is one thing. Yet, it involves a whole other set of risk elements that must be known and considered before doing so in overnight trading.
For the most liquid ETFs meaning those that have high liquidity and tight bid/ask spreads, it is possible to continue to trade and trade seamlessly in both after-hours and premarket hours, which for most firms offer the trader an additional 6-7 hours that same day, to buy or sell positions.
Overnight trading of 3 X ETFs differs from regular market-hour trading in the same way it does with other securities.
There is less stock out there; thus, the opportunity to obtain the tight bid/ask of regular market hours is more difficult. That is why one must look only for those 3X ETFs that offer the tightest bid/ask spread possible in regular and overnight trading hours. Doing so will ensure that your risk is “managed” in the best possible way 24/7.
As many investors and traders know, overnight NEWS items hit the marketplace regularly, some of which will have a material impact on either stock or index pricing the following day at the open.
Day Trading ETFs Overnight – The Advantages
A key advantage of trading 3X ETFs in overnight trading is that it allows the trader to immediately react to that news item and enter or exit a position without suffering the fate of other investors. This prevents you from being punished by the regular “Gap Open” on the overnight news, which is so prevalent in the market.
That risk, and that risk alone, should make a trader look to HEDGE themselves in any way possible to avoid the serious potential drawdown to a trading account that happens when overnight news items all hit at the beginning of the trading day and during normal market hours.
So with that being said, another key advantage in owning and trading 3 X ETFs is that hedging is immediately available to you during overnight trading hours.
3 X ETFs, both Long and Short, trade off the underlying index futures trading contracts in overnight trading when cash index pricing is unavailable. That is an important point.
One must be familiar with the futures markets, the available price charts, and how they work to be completely aware of the risks associated with that type of trading.
I have always kept Daily/ Weekly Charts on the S+P 500 and Dow Futures charts updated continually, so I can react quickly and decisively to overnight and regular trading hour price moves.
Futures prices “lead” the cash index prices all the time, so it is particularly important to know those instruments well in overnight trading.
Leveraged ETF Strategy Example
In the United States, on 11/8/16, Election Night for President Trump, the Dow Jones Industrial Futures swung from a loss of nearly 800 points overnight to being only fractionally down at the open of trading on the NYSE.
If one had owned a short position in a 3 X ETF in the Dow, as I did with Pro Shares 3 X Short ETF SDOW, a trader would have realized a substantial profit in overnight trading hours by being short; that was GONE by the time of the US market OPEN on the NYSE.
That downside gap in Dow Futures of almost 800 points remains open on the chart to this day, essentially price action in the futures market that was never seen during regular trading hours.
In summary, overnight trading in the United States is filling a great need for investors and traders to hedge and profit from news and price changes in markets around the globe and around the clock.
What happens in trading in the Chinese, German, and European markets, along with other emerging market country markets overnight, definitely impacts the US market on the opening of trading every day throughout the year.
Isn’t it a huge edge to take clear advantage of every opportunity 24/7 in the marketplace rather than be limited to just daytime trading hours each day?
In the world of 3X ETFs, that advantage is given to professional traders/investors every day. They are taking advantage of it, shouldn’t you?
18 Best ETFs for Leveraged Day Trading
This is the list of tried and tested ETFs I use, typically ETFs for the major index averages, Dow Industrial Average, S&P 500, and the Nasdaq 100
Best 3X Index ETFs for Long Positions:
- SPXL: Direxion’s 3X LONG S&P 500
- UDOW: Pro Shares 3X LONG Dow Jones Industrial Average
- TQQQ: Pro Shares 3X Long Nasdaq 100
Best 3X Index ETFs for Short Positions:
- SPXS: Direxion’s 3 X SHORT S+P 500 ( Tight Bid/Ask Spreads 24/7)
- SDOW: Pro Shares 3 X SHORT Dow Jones Industrial Average
- SQQQ: Pro Shares 3 X SHORT NASDAQ 100 (Tightest Bid/Ask Spreads Available 24/7)
Best ETFs for GOLD
- NUGT: Direxion Daily Gold Miners Index Bull 2XShares
- DUST: Direxion Daily Gold Miners Index Bear 2X Shares
Best ETFs for Interest Rates
- TBT: ProShares UltraShort Lehman 20 Year Treasury
- TMV: Direxion’s 3X Short 20 Year Treasury Bond ETF
Best ETFs for Crude Oil
- UCO: ProShares Ultra Bloomberg Crude Oil
- DRIP: Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares
Best ETFs for Natural Gas
Best ETFs for Technology Stocks
Best ETFs for the Russell 2000 Index
I hope you enjoyed the article and I have opened your eyes to the world of ETF Trading.
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- Investing In Mutual Funds Pros & Cons
- How to Invest in Index Funds to Maximize Long-term Profits
- ETFs vs. Mutual Funds vs. Index Funds: Simply Explained
- Investing in Index Funds: Everything You Need to Know
- ETFs vs. Stocks. 7 Reasons ETFs Are Better