Posted on 19 August 2012.
To maximize trading profits from stock market moves and volatility, many stock market traders use leveraged Exchange Traded Funds (leveraged ETFs). While not suitable for long term investing due to their tendency to track underlying indexes or stock market sectors poorly over long periods of time, leveraged ETFs can be very profitable trading vehicles to cash in on short term stock market trading opportunities.
Leveraged ETFs are available to trade both broad stock market indexes, such as the S&P 500 Index, and focused stock market sectors. The following are two examples of leveraged ETFs that can be utilized to trade three times the daily move in the S&P 500 Index in either the long (up) direction or short (down) direction.
- Daily S&P 500® Bull 3x Shares (SPXL) - SPXL seeks daily investment results, minus fees and expenses, that equal 300% of the performance of the S&P 500 Index. SPXL is an investment vehicle that maximizes profits when the S&P 500 Index moves higher on a given day.
- Daily S&P 500® Bear 3x Shares (SPXS) - SPXL seeks daily investment results, minus fees and expenses, that equal -300% of the performance of the S&P 500 Index. SPXS is an investment vehicle that maximizes profits when the S&P 500 Index moves lower on a given day.
Daily Small Cap Bull 3x Shares (TNA) and Daily Small Cap Bear 3x Shares (TZA) are leveraged ETFs that can be utilized to trade three times the daily move in the Russell 2000 Index in either the long (up) direction or short (down) direction. The Russell 2000 Index measures the performance of the small-cap segment ofUnited Statesstock markets
For traders that looking to take advantage of sector-specific stock market moves, there are a variety of leveraged ETFs that offer daily 300% returns on the long and short side for specific stock market sectors, from semiconductors (SOXL 300% long, SOXS 300 % short) to healthcare (CURE 300% long, SICK 300 % short), to financial markets (FAS 300% long, FAZ 300 % short).
While leveraged ETFs can offer exciting trading opportunities and are an excellent way to maximize profits on short term trading opportunities, proper trading capital protection methods should be utilized when trading leveraged ETFs. Since leveraged ETFs double or triple a stock market trader’s exposure to either the broad stock market or specific stock market sectors, the potential for excessive losses increases, if the trade does not turn out as expected. Using tight stop losses and following strict position size limits to prevent having too much trading capital in any one leveraged ETF at any given time are two ways to reduce the risk of substantial losses when trading leveraged ETFs. The key to the leveraged ETFs trading game is to maintain trading capital by limiting downside risk, so a trader can stay in the leveraged ETFs game and maximize profits from winning leveraged ETF trades.
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