Summary: Shorting can be a lucrative trading strategy, but you have to understand the risks involved to execute your trades carefully. In this guide, you will learn how to trade SQQQ and short the NASDAQ 100 through a reputable brokerage platform like eToro.
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About the NASDAQ 100
The NASDAQ 100 is an index composed of the stocks of 100 of the largest non-financial companies traded on the NASDAQ exchange. The index uses a modified capitalization-weighted system, so each company’s market cap influences its weight, but with specific rules in place to limit the dominance of the biggest firms.
What is the SQQQ?
Short selling vs. Inverse funds
Short selling is a trading strategy in which investors aim to profit from a decline in the price of a stock by borrowing shares from a broker and selling them, with the intention of repurchasing them later at a lower price.
In the context of an inverse ETF like SQQQ, the ETF itself is designed to achieve similar results by moving inversely to the NASDAQ 100 Index. Instead of borrowing and selling stocks directly, investors can buy shares of SQQQ, which uses financial derivatives — such as options, swap contracts, and futures contracts — to produce gains when the Nasdaq-100 falls. This allows traders to benefit from market declines without engaging in traditional short-selling.
What is the problem with inverse ETFs?
While shorting the NASDAQ 100 might seem like a viable strategy for those who expect the index to decline over time, it’s important to understand that this approach is generally unsuitable for long-term holding, even for the most bearish investors.
Inverse exchange-traded funds (ETFs), like the ProShares UltraPro Short QQQ (SQQQ), are designed to provide leveraged exposure to the downside of the NASDAQ 100, but they are meant for intraday trading, not for holding over extended periods.
The reason lies in the inherent structure of these products. Inverse ETFs are subject to daily rebalancing, which leads to a phenomenon known as decay. This decay can significantly erode returns over time, especially in a volatile market where the index experiences frequent fluctuations. Additionally, the expense ratios and fees associated with these products further reduce their effectiveness as long-term investments.
For these reasons, even if you strongly believe the NASDAQ 100 is overvalued and poised for a decline, shorting through instruments like SQQQ should be approached with caution. It’s more appropriate for short-term trades that capitalize on daily price movements rather than as a core component of a long-term investment strategy.
How to trade SQQQ: Step-by-step
You can short the NASDAQ 100 by trading ETFs such as the ProShares UltraPro Short QQQ (SQQQ).
To trade SQQQ stock, simply:
- Find a reputable broker;
- Fund your account;
- Buy SQQQ stock;
- Manage your trade.
Step 1: Find a reputable broker
To trade SQQQ and short the NASDAQ 100, you first have to choose a reputable broker that offers short-selling services.
Our go-to trading platform is eToro, a brokerage known for its user-friendly interface and wide range of financial products and trading features such as:
- Commission-free stock trading;
- Access to over 2,000 stocks from 17 different exchanges;
- Limited margin accounts;
- Charting tools;
- A user-friendly platform that simplifies the trading experience.
Highly Rated Stock Trading & Investing Platform
-
Invest in 2,800+ stocks and other assets including 70+ cryptocurrencies and commodities.
-
0% commission on buying stocks - buy in bulk or just a fraction from as little as $10. Other fees apply. For more information, visit etoro.com/trading/fees.
-
Copy top-performing traders in real time, automatically.
-
eToro USA is registered with FINRA for securities trading.
Step 2: Fund your account
After selecting a broker, the next step is to register and fund your trading account. This typically involves transferring money from your bank account to your brokerage account, so be sure to carefully follow the instructions provided by your broker to ensure a smooth and successful deposit.
Step 3: Trade SQQQ stock
Once your account is funded, navigate to the SQQQ page on your chosen platform and click on the Trade button. Before finalizing the trade, carefully review all the details. Once you’re confident enough to invest, swipe up or click to confirm your purchase.
Disclaimer: TradingView does not recommend trading financial instruments based exclusively on the advice of the Technical Rating indicator. These recommendations cannot predict future movements and are meant as assistance for spotting potentially favorable buy/sell conditions if this is consistent with their strategy.
Step 4: Manage your trade
SQQQ is an inverse ETF that provides 3x inverse exposure to the NASDAQ 100, meaning it amplifies both gains and losses. Due to its daily reset feature, it’s not suitable for long-term holding, so it’s essential to set clear entry and exit points and monitor your trade.
Determine your entry price and establish a target exit price, along with a stop-loss level to protect against significant losses. Given SQQQ’s inherent volatility, it’s crucial to monitor the market closely and be prepared to adjust your position based on market movements.
To effectively trade SQQQ, utilize technical indicators such as moving averages, RSI, and MACD, and pay attention to key support and resistance levels. Since the ETF is designed for intraday trading, it’s best to avoid holding it for extended periods. Holding SQQQ long-term can expose you to increased risk due to its compounding effects and the daily resetting mechanism.
Pros and cons of trading SQQQ
Pros
- Potential for positive returns: If you correctly predict a decline in the NASDAQ 100, trading SQQQ can lead to significant profits due to its 3x inverse leverage;
- Cost-effective market hedge: When used strategically, SQQQ can serve as an effective and relatively low-cost hedge against downturns in the tech-heavy NASDAQ 100;
- Ideal for day traders with high risk tolerance: SQQQ is well-suited for traders who thrive on daily market movements and are comfortable with higher levels of risk.
Cons
- Severe loss potential: SQQQ is designed for short-term, high-risk trades, and holding it for longer periods can result in significant losses, especially if the Nasdaq-100 trends upward, as it typically does over time;
- High costs: Due to expenses and decay, the longer you hold SQQQ, the more your returns are likely to be eroded, making it unsuitable for long-term investment;
- Risk of market disruption: Given SQQQ’s reliance on the Nasdaq-100 deviating from its historical growth pattern, sudden market rallies can lead to rapid losses and force traders to exit at unfavorable prices;
- Not a long-term investment: SQQQ’s structure makes it a poor choice for a core portfolio holding, as its long-term outlook is inherently negative due to the general upward trend of the Nasdaq-100;
- Extreme volatility: SQQQ is prone to wild price fluctuations, and its small size increases the risk of it being shut down, adding an extra layer of risk for investors.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs about how to trade SQQQ
Can you short the NASDAQ 100?
Yes, you can short the NASDAQ 100 by trading the ProShares UltraPro Short QQQ (SQQQ) ETF on online trading platforms such as eToro.
What is SQQQ?
UltraPro Short QQQ is an inverse-leveraged ETF that tracks an index of 100 of the largest non-financial companies listed on the NASDAQ Stock Market, both domestic and international, based on market capitalization.
Is SQQQ a long-term investment?
It’s generally not recommended to hold SQQQ as a long-term investment. It is intended for short-term trading due to the effects of compounding and market fluctuations.
What are the risks of SQQQ?
Investing in SQQQ can be risky due to its leveraged nature and daily trading focus.
Highly Rated Stock Trading & Investing Platform
-
Invest in 2,800+ stocks and other assets including 70+ cryptocurrencies and commodities.
-
0% commission on buying stocks - buy in bulk or just a fraction from as little as $10. Other fees apply. For more information, visit etoro.com/trading/fees.
-
Copy top-performing traders in real time, automatically.
-
eToro USA is registered with FINRA for securities trading.
