Short Swing Trading Using Inverse ETF's

With the recent volatility and sell off on Wall Street I think it is a perfect time to discuss how you can profit from these down moves in the market.

One of the ways to profit when a market or specific trading instrument goes down in price is called "shorting" or "short selling".

For this article we will assume you understand the basics of "shorting" and we will use stocks and ETF's to make it easier for everyone to follow along.

Understand though that "shorting" can apply to wide array of trading instruments including futures contracts, bonds and currency pairs (forex).

For some reason a lot of traders, especially new traders, have a hard time understanding the dynamics of shorting and therefore do not utilize this very powerful option very much, if at all, when they trade.

If you are going to be successful as a trader you need the ability to profit in any type of market environment.

Learning how to profit when markets decline is an essential skill for you master.

If you are one of those traders that just don't feel comfortable "shorting" yet lets discuss a technique that you can use to potentially profit when a stock or sector goes down in price without having to "short" anything.

One of the most popular instruments available to trade today are Exchange Traded Funds or ETF's.

Due to the numerous benefits they offer to short term traders and active investors the number of ETF's has grown at a dizzying pace over the past few years.

ETF's cover just about every sector and segment of the market that you can think of.

From Financials to Gold and from Solar Power to Airlines there is an ETF out there that tracks that sector.

One type of ETF that is avaliable to trade is called an "Inverse" ETF.

Inverse ETF's are designed to due to opposite (or inverse) of what the actual index is doing.

For example if the Financial sector is trading UP 2% this week then we would expect the Inverse Financial ETF to be doing the opposite and to be trading DOWN around 2% this week.

On the contrary if the Financial sector was trading DOWN 5% for the month we would expect the Inverse ETF to be UP the same amount.

So, as a swing trader, how do you take advantage of and potentially profit form using Inverse ETF's?

Let's say that you aren't rally sure about the overall direction of the market but in doing your research you notice significant weakness in the Oil and Gas sector.

Every chart you look at in this sector is telling you that this sector is weak and may continue to decline.

You take a quick look at the chart of the Oil and Gas ETF and notice the same obvious weakness.

You wish you could get involved and profit from the next potential down move but you just do feel comfortable with this whole "shorting" thing yet.

So what can you do?

You then locate the symbol for an Inverse ETF for the Oil and Gas sector and pull up the chart to take a look.


Your "bearish" chart patterns now look "bullish" on this chart since it does the opposite of the regular ETF.

Now you proceed just as you would in any other situation,

You apply the same strategies or techniques you use when you enter into any other "LONG" position.

You simply buy the Inverse ETF and hopefully profit when price moves higher.

The same is also true even if your trading strategy is based on indicators and/or oscillators or a combination of the two.

If your indicator is telling you that the regular ETF is "overbought" then the same indicator will read that the Inverse ETF is "over sold" (or close to it) and vice versa.

If the regular ETF is "breaking down" out of a price channel and moving lower then the Inverse ETF should be "breaking out" and price should be moving higher.

That is the beauty of using Inverse ETF's.

You don't have to develop a new strategy or method to trade them.

You can still trade a "LONG" only method but by using Inverse ETF's your "LONG" only strategies have a chance to profit when markets decline.

Click HERE for a complete list of popular Swing Trading Inverse ETF's.