Volatility exchange traded funds (ETFs) and 澳洲幸运5官方开奖结果体彩网:exchange traded notes (ETNs) can sometimes offer interesting day trading opportunities in volatile mark꧋ets. At other, less volatile times, volatility ETFs should be left alone.

A volatility ETF will typic🐠ally move in the opposite direction to major stock market indexes, such as the S&P 500 Index or the 💫Dow Jones Industrial Average.

For example, when the S&P 500 is rising, 澳洲幸运5官方开奖结果体彩网:volatility ETFs and ETNs—such as the iPath S&P 500 VI📖X Short-Term Futures ETN (VXX)—will typically decline. On the other hand, when the S&P 500 is falling, volatility ETFs 𝕴and ETNs will usually rise.

ETFs vs. ETNs

​Alt�𝓀�hough all are commonly referred to as volatility ETFs, some are actual ETFs and others technically are ETNs.

An ETF is a fund that trades on stock exchanges and holds assets that are in the index that it tracks. An ETN is an 澳洲幸运5官方开奖结果体彩网:exchange traded note, which♌ also trades on exchanges, but is structured as a debt security and doe🍸s not hold any assets.

ETNs don't have the 澳洲幸运5官方开奖结果体彩网:tracking errors that ETFs may be prone to because ETNs only track an index. ETFs, on the other hand, invest in assets (again, those held in a benchmark index), and the valu👍e of those assets can deviate from the index itself.

When divergences happen, they can create discrepancies between the performance of the ETF and the index it is supposed to represent.

Nevertheless, ETFs and ETNs are both acceptable for day trading volatility, as long as the ETF or ETN being traded has a lot of 澳洲幸运5官方开奖结果体彩网:liquidity. Liquidity is measured by trading volume or tᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚhe number of shares traded ea🐷ch day. 

Choosing a Volatility ETF/ETN

There are a variety of volatility exchange-traded funds to choose from, including 澳洲幸运5官方开奖结果体彩网:inverse volatility ETFs. An inverse volatility ETF will generally move in the same direct🌃ion as the major stock market indexes (the opposite/inverse dꦿirection of traditional volatility ETFs).

When day trading, a simple ETF/ETN with high volume is usually the best choice. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is the largest and most liquid in the volatility ETF/ETN universe.

How to Day Trade VXX

​VXX usually experiences explosive moves when the S&P 500 declines. They typically far exceed the movement seen in the S&P 500. For example, a 5% drop in the S&P 500 may result in a 15% gain in VXX. Therefore, trading VXX provides more profit potential than simply shorting the 澳洲幸运5官方开奖结果体彩网:SPDR S&P 500 ETF Trust (SPY).

Since VXX has this tendency for major gains on declines in its benchmark (the 澳洲幸运5官方开奖结果体彩网:Standard &🐬; Poor’s (S&a💝mp;P) 500 Index) when the S&P 50🍸0 rallies again, VXX typically 🍌sells off in a dramatic fashion.

Day traders have two ways to profit:

• Buy VXX when the S&P 500 is declining.
• Short VXX following a price spike, once the S&P 500 begins to rally higher again, and VXX is falling. 

Depending on the size of the trend in the S&P 500, favorable trading conditions in VXX can last for several days or up to several months. The charts below show a short-term decline and reversal in the S&P 500 and the co💝rresponding rally and selloff in VXX.

The charts confirm that VXX has a tendency for big moves. The ETN (top chart) rallied 105% based on an 11.84% decline in the S&P 500 (bottom chart). It then fell 31.6% when the S&P 500 bounced 10% off the low. Such are the times that𒈔 day traders will want to be trading VXX.

When the S&P 500 is in a quiet uptrend with little downside movement, VXX will decline slowly. These times a🎃re not ideal for day trading. The big opportunities for day trading come during and in the aftermath of a several percentage point decline or more in the S&P 500.

VXX Can Signal a Change

Volatility ETFs or ETNs, such as VXX, will quite often lead the S&P 500 Index. When this occurs, it signals which side of the trade you want to be on (澳洲幸运5官方开奖结果体彩网:long or short). For example, the charts below provided 𝕴several c🎉lues that the S&P 500 would move higher.

VXX (top chart) was weaker in the morning, moving lower overall even when the S&P 500 (bottom chart) made a lower low. Then, VXX broke its major support level just after 12 p.m., indicating that the S&P 500 could eventually break through its 澳洲幸运5官方开奖结果体彩网:resistance level. It did so about 30 minutes later.

VXX won't always lead the S&P 500. Sometimes the S&P 500 will leadꩲ, which can also provide us with clues for day trading VXX.

Entry and Exit Points

The biggest intraday opportunities occur in VXX when there is a significant drop (or subsequent rally) in the S&P 500. During such times, the following entry and stop points can be used to extra🍒ct profit from the volatility ETN.

The charts below provide an example. At 10:43 a.m., the S&P 500 (bottom chart) has just made a lower low and then starts to rally. At that same time, VXX (top cha⭕rt) is well below its high and is forming a sideways channe🌠l (highlighted by the rectangle on the chart).

The S&P 500 continues to rally. A day trader should now be piecing together that VXX is weak (lower low) and that, if the S&👍;P 500 is rallying, then VXX is likely to start dropping soon. 

Entry Point

Wait for a 澳洲幸运5官方开奖结果体彩网:trade trigger. This is an event that actually tells you the price is starting to drop. In this case, VXX is moving in a channel or a small 澳洲幸运5官方开奖结果体彩网:consolidation above $33.38. If the price drops below $33.38, then the channel is broken, and, given the other pieces of evidence, a short 🌄trade in VXX can be taken.

Exit Point

Placing a 澳洲幸运5官方开奖结果体彩网:stop-loss order at $0.02 above the most recent high (which occurreℱd just prior to entry) makes sense to protect the short position. If going long, a trader should place a stop-loss order at $0.🧸02 below the most recent low that occurred just prior to entry.

Alternatively, set a target that is a multiple of risk. If your risk on a trade is $0.14 per share, aim to mak🐲e a profit at two times your risk (or $0.28). For example, the short trade above was initiated at $33.37 with a stop-loss order at $33.51.🌼 The distance between the entry and stop loss is $0.14.

Therefore, aim to make at least $0.28 on the 𓃲trade (two times risk) by p🌠lacing the target $0.28 below entry at $33.09. This two-times-risk multiple is adjustable based on volatility. In very strong trends, profits may even equal three or four times the amount at risk.

The same method applies when VXX is strong and the S&P 500 is weak. VXX will be moving higher; wait for a pullback and a pause or consolidation. Then, when the pri🉐ce breaks above the top of the consolidation, enter a long position. Place a stop-loss order just below thꦍe low of the pullback.

When to Exit

Exit trades if you notice the overall trend in the market shifting against you. If you are short, a higher 澳洲幸运5官方开奖结果体彩网:swing low or higher 澳洲幸运5官方开奖结果体彩网:swing high indicates a potential trend shift. If you are long, a lower swing low or lower swing high🔜 indicates a potential trend shift.

The Bottom Line

Volatility ETFs and ETNs usually have larger price swings than the S&P 500, making them ideal for day trading. The greatest opportunities (in terms of percentage price moves) come during, and shortly after, the S&P 500 has significant declines. A volatili🌸ty ETN, such as the iPath S&P 500 VIX Short-Term Futures ETN, may even foreshadow what the S&P 500 is going to do next.

Exiting all trades when the market turns against you is a good way to limit risk. Profits should be 澳洲幸运5官方开奖结果体彩网:larger than losses. This way, even if only half the trades are winners (profit target is reached), the strategy is still a profitable one.

If you can't reasonably expect to make a profit at least two times your risk based on that day's volatility, then don't trade using this strategy.