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Leveraged ETFs: Tips For Trading These "Dual-Edged Swords"
The good news: leveraged ETFs (like FAZ, ERX) move faster and further than typical index ETFs during a typical trading day. The bad news is that this can cut both ways, so being wrong can quickly add up to faster potential losses than one would have trading the regular index ETFs (like QQQQ).
Understanding the dynamics of "pairs" like FAZ (financial 3x bear) and FAS (financial 3x bull) and how they move can provide valuable trading insights into volatility patterns and pivot locations.
When trading leveraged ETFs, it's important to identify specific entry signals (hammers, shooting stars, cups) as well as using solid risk management strategies as part of your overall trading plan. These are a favorite instrument for seasoned day traders.
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The ERX "Direxion Daily Energy Bull 3x" chart below shows a nice clear trading range for this during an uptrending breakout. As these move further and faster than regular ETFs, leveraged ETFs are subject to faster breakouts and retracements of further depth than regular index exchange-traded funds are — while leveraged ETFs have superb trading potential, they also have higher risk.
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Leveraged ETFs: Bigger Trading Ranges, but Bigger Risk
It's interested to see exactly how one ETF may move compared to another one — comparing the trading ranges, prices and trading patterns of leveraged vs non-leveraged ETFs can be a useful scanning activity for active traders.
With bigger opportunity comes larger risk. Though these don't move dramatically, eg with 6-10 point ranges, they do seem to pivot and breakout faster than other ETFs, so they're best day traded by those with a lot of experience, or swing traded by traders who are able to use tight protective stops.
In trading paired ETFs like FAZ/FAS, it's also helpful to note whether there's a pattern to early-morning breakouts that's consistent (eg open range breakout, heafake reversal by 9:50am, then continuation til 10:30am) that can give you a better clue as to how to trade these.
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