Day Trading With Leveraged ETFs (2024)

Day Traders Need Fundamentals

Even if you are planning on closing your positions at the end of the trading day, it would be wiseto get a brief understanding of the fundamental factors that can impact theseETFs.Althoughtechnical analysis will probably be the main tool in your arsenal, fundamental factors from around the world, especially events that happen overnight, can dictate the direction of the trend the following morning.

Below, we'll discuss the fundamental factors that can affect some of the most popular leveraged ETFs.

Leveraged Gold Miners 3x

The Direxion Daily Gold Miners Index Bull 3x Shares (NUGT) and the Direxion Daily Gold Miners Index Bear 3x Shares (DUST) track the New York Stock Exchange (NYSE) Arca Gold Miner’s Index. This index is affected by geopolitical events, natural disasters,fluctuations in the U.S. dollar andannouncements regarding U.S. monetary policy.

Key information releases to watch for when trading these two products are the Federal Open Market Committee meeting (FOMC) statements. The FOMC releases these statements about three weeks after each of the committee’s eight yearly meetings, and after monthly economic reports that can potentially impact monetary policy. Such impactful monthly reports include the Consumer Price Index (CPI), Employee Situation Reportand retail sales reports.

Long and Short Crude Oil 3x

The ProShares Ultra Bloomberg Crude Oil (UCO) and the ProShares UltraShort Bloomberg Crude Oil (SCO) track theBloomberg WTI Crude Oil Subindex. As such, they are affected by moves in oil prices due to geopolitical events andNorth American supply and demand.

Key information releases to track U.S. inventories are the American Petroleum Institute's“Weekly Statistical Bulletin,” on Tuesdays, and the Energy Information Administration's report, “This Week in Petroleum,” on Wednesdays. Another important information release is the Baker Hughesrig count, published every Friday at noon central time.

Large and Small Caps 3x

The Direxion Daily Small Cap Bull 3x Shares (TNA), Direxion Daily Small Cap Bear 3x Shares (TZA),ProShares UltraPro S&P 500 (UPRO), ProShares UltraPro Short S&P 500 (SPXU),ProShares UltraPro (TQQQ), and theUltraPro Short QQQ (SQQQ), are all trackers of major U.S. benchmark indices. As such, they are susceptible to the many macroeconomic factors that affect the U.S. capital markets. These can include the following:

• Geopolitical events
• Volatility in international equity markets
• Economic reports and Federal Reserve announcements
• Earnings reports by major companies
• Volatility in the bond markets and futures markets

S&PBiotech 3x

The Direxion Daily S&P Biotech Bull(LABU)and theDirexionDaily S&P Biotech Bear 3x (LABD)tracks the NYSE Arca Biotech Index and are susceptible to the same ebbs and flows of the American capital markets. However, as they are concentrated in the biotech sector, keep an eye out for results from U.S. Food and Drug Administration clinical trials, mergers, and acquisitions of biotech firms, and earnings reports from the big-name biotech companies.

These large biotech companies include Gilead Sciences(GILD), Celgene Corp. (CELG), Amgen Inc. (AMGN), Regeneron Pharmaceuticals Inc. (REGN) and Biogen Inc. (BIIB).

Emerging Markets 3x

Direxion Daily Emerging Markets Bull 3x (EDC) and theDirexionDaily Emerging Markets Bear 3x (EDZ) seek to replicate three times the movement of the MSCIEmerging Markets Index.Although a guide on trading the MSCI Benchmark could fill a book, keep an eye out for overnight swings in commodities, the Asian and European markets, forex markets and economic news coming out of the index's constituents, as these factors can heavily dictate the direction of the next trading day.

Making Leveraged ETF Day Trades

Unlike most guides on trading, this one will feature no strategies on technical analysis owing to its subjective and after-the-fact nature. I will assume that the reader has already built a familiarity with the basic principles of technical analysis and can adapt those techniques to trading leveraged ETFs. Here are a few additional tips:

Set Stop Losses

Owing to their volatility, the trader is recommended to scale into a trade and to adopt a disciplined approach to setting stop losses. Furthermore, as bigswings are quite common in these securities, set stop losses wide enough so that you do not get stopped out before a massive run in the direction of your hypothesis.

Do Not Hold Shares Overnight

Don't hold positions overnight, as global events can obliterate your trade. It is not uncommon to see leveragedfunds gap down 5% to 10% the next morning. Your stop losses will not protect you in such instances. Either reduce positions or close them out entirely at the end of the day.

Follow Paul Tudor Jones

Famous hedge fund manager and trader extraordinaire, Paul Tudor Jones, had this piece of advice stuck to his office wall:“LOSERS AVERAGE LOSERS.” While averaging down is an excellent strategy for long-term investors and swing traders, averaging down on a losing trade in a 3x ETF is like throwing your money out the window.

Know the Key Dates

Every week or so, there will be a pivotal event that can affect these funds. For example, the oil ETFs tend to trade sideways in the minutes leading up to the Energy Information Administration and Baker Hughes reports. Depending on the overall trend, market sentiment and the prior week’s report, some traders like to place their bets on the post-report movement. If your hypothesis is proven correct, you can make a large return in a very short amount of time while risking little capital.

Check the Overall Trend

Finally, bear in mind that although day trading takes place over a time span measuring inminutes, the day's movements are indicative of the bigger picture. Use the daily, hourly and 15-30 minute charts to gaugesupport and resistance levels from the prior day's (week's) trading. Usually, an area of strong support and resistance that has been tested multiple times can prove to be a better entry or exit point than a level that appears during the course of the day.

The Bottom Line

Leveraged ETFs are not for the faint of heart. Traders who can stomach the volatility can realize large gains (or losses) on their positions very quickly. That said, when trading these wild instruments, be sure to check the underlying asset that they track so you can have a sense of direction they will take each trading day.

Furthermore, traders who bet on these funds should have an adequate risk management strategy in place and be ready to close out their positions at the end of each market day.

Correction—June 11, 2024: This article has been corrected to state that the ProShares UltraPro / UltraPro Short QQQ are 3x leveraged.