Day trading carries the potential for both huge profits and massive losses. On the other hand, index funds are slow-growing and relatively safe investments based on diversified securities. While they seem at odds, there is a lucrative opportunity (and potential risk) in day trading index funds.
Here are the basics of how to day trade index funds:
- Consider Your Capabilities
- Understand Market Concepts
- Assess Indices and Index Funds
- Craft a Trading Plan
- Choose a Broker
- Run Simulations and Tests
- Start Small!
- Debrief and Review Your Strategies
This article dives into the basic steps of day trading index funds. It does not provide investing recommendations or financial advice. Instead, it is a guide covering the fundamentals of this strategy and providing helpful resources to get you started.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
8 Steps To Successfully Day Trade Index Funds
Consider Your Capabilities
Day trading is considered one of the most challenging forms of trading. Consistent profit through day trading index funds requires in-depth research, risk-taking, and commitment.
There are also monetary hurdles to becoming a day trader. For example, you need sufficient capital to cover the $25,000 minimum equity requirement for pattern day trading.
Without covering that requirement, you won’t be able to day trade more than three times per five trading days. If your broker has already designated you as a pattern day trader, you’ll need that $25,000 to day trade at all.
Newcomers to trading should also contemplate how much they’re willing to spend. Any money you invest has the potential of being lost, so only use what you can afford to lose. Day trading is very similar to gambling, and it’s just as important to set limits for both.
Day trading index funds is lucrative when done right and more accessible than ever before. However, keep in mind the best day traders have extensive experience, knowledge of market trends, and invest full-time. If you don’t have time to conduct research or are risk-averse, you might struggle to find consistent success.
Understand Market Concepts
When it comes to investing, knowledge is power! A solid foundation of stock market knowledge is beneficial regardless of what type of trading you pursue. Even if you’re an experienced investor, you should review regulations around day trading and how index funds work before tackling them.
Day trading, which is buying and selling an asset on the same day, is complex and has various rules. For example, pattern day traders must keep at least $25,000 in their account at all times to continue day trading. You can read more about day trading and minimum equity requirements on FINRA’s official website (link in article sources below).
Meanwhile, index funds are baskets of securities meant to closely match the performance of a market index (such as the S&P 500). They accomplish this through a diverse collection of investments mirroring what that particular index tracks. You can see a brief overview of these traditionally passive investments in this video.
Newcomers also might not realize the difference between types of index funds, specifically index mutual funds vs. ETFs. Notably, only ETFs (exchange-traded funds) can be day traded like stocks are. Since mutual funds are traded only once per day after the market closes, they are NOT a part of any day trading strategies.
Assess Indices and Index Funds
Once you have a solid grasp of how the market works, it’s time to start researching indices and index funds. While index funds are traditionally considered safe investments, they are not immune to the hazards of day trading. After all, the strategy of day trading index funds is finding short-term profit in ETFs meant for long-term investing.
Moreover, take any buy or sell recommendations you read for index funds with a grain of salt. The conventional analysis behind those recommendations generally focuses on growth over time, not day trading. As a result, they might be misleading for your purposes without further context.
Even though there are plenty of resources recommending indices for you to track, definitely do your own research. Investors receive valuable information from watching the news and observing social trends. Broad as index funds are, numerous factors influence their price movement.
Also, remember you can’t day trade mutual funds! When looking at index funds, stick to ETFs.
Craft a Trading Plan
Deciding on day trading and picking a couple of index funds is not a complete investment plan. Traders also must consider the various strategies that underpin day trading, such as momentum and fading.
Most of your trades will be unguided guesswork if you don’t have a solid plan. And when it comes to day trading especially, flippant investments like that are often doomed to fail.
To avoid losing money, you want the most water-tight and efficient system possible. This overarching goal is why investors often trial their plans through simulation before using real money (more on how to do that later).
For day trading specifically, one of the most popular tactics is scalping. Scalping essentially is when you sell an index fund (or other security) the moment it becomes profitable to do so. Sometimes, this means they are bought and then sold only seconds later!
Scalping is popular among day traders since it offers the highest probability of success. After all, your price target is simply “more than I started with.” Still, there are numerous other investment strategies worth investigating.
Choose a Broker
With specific securities and a trading plan in mind, you are ready to select a broker. Thankfully, there are a plethora of reputable and versatile brokers for you to pick.
Determining which broker is best for you depends mainly on what you want to trade. For example, someone interested in crypto wouldn’t want a broker that doesn’t offer cryptocurrency on its exchange.
While many large brokers offer index funds, you also have to consider each broker’s rules around day trading and liquidation. Some may not allow you to sell your index funds immediately or will require notice.
For the purposes of this guide, ensure your broker permits you to day trade ETFs. You’ll also want one that preferably has a low (or no) commission.
Run Simulations and Tests
Before committing your hard-earned money to a trading plan, consider testing it through market simulators. Simulations offer you a chance to feel out these strategies and adjust them as necessary without real risk.
Many brokers allow you to do just this through a test account. These accounts let you invest in virtual securities however you choose without spending real money.
Even though the investments aren’t real, they still mirror real-world price fluctuations. So, you can determine the efficiency of your plans as if you had actually traded those funds.
While using this tool isn’t a requirement, it is undoubtedly a massive boon to your chances of profit. If you don’t have a broker, you can also try TradingView.
Start Small!
At this point in the process, you can start executing your first day trades. It’s tempting to go all-in after earning your first gains. But remember, day trading is as risky as it is lucrative.
The last thing you want to do is overcommit to a system that only worked well the first couple of times you attempted it.
Starting small allows you to test multiple strategies and see which provides the most significant, consistent returns. If you have trouble resisting the urge to go big now, remember the stock market isn’t going anywhere. There will always be more opportunities to capitalize on in the future.
Debrief and Review Your Strategies
After executing your plans, it’s vital to review them. You won’t know how effective your strategies were until you analyze and compare them to each other.
Revisiting plans at least monthly (weekly is better) gives you many opportunities for improvement. Not to mention the market is fluid, so your strategies should be too.
However, don’t dwell on your failures! The stock market is impersonal, and everyone sometimes loses. What’s important is that you invest safely and learn from mistakes.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Day trading is generally considered a riskier form of investing, and index fund investing is often touted as the safest. However, there are opportunities for investors to day trade ETF based index funds.
In doing so, the investor must fully understand the risk associated with day trading index funds, know the nitty gritties of the financial markets and have a profitable strategy that is properly backtested. The eight steps covered in this article will provide you a solid foundation in this risky business.
For more concrete investing methods and strategies, feel free to check out my other articles on TradeVeda!
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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