Why ETFs are the Perfect Option for Swing Trading

If you’re looking to swing trade, exchange traded funds may be the perfect option for you. ETFs offer many advantages over stocks, including diversity, liquidity, and lower costs. Swing trading with ETFs can help you earn consistent profits in the market while minimizing your risk.

Read on to learn more about why ETFs are the perfect option for swing trading for some traders.


What Are Exchange Traded Funds?

Exchange traded funds are a type of investment vehicle that trades on a stock exchange. ETFs offer investors/traders exposure to a basket of assets, such as stocks, bonds, commodities, or currencies. ETFs are similar to mutual funds in that they carry a basket of securities, but they trade like a stock on an exchange.

ETF TICKERSWhen owning a single share of an ETF, you actually have an indirect interest in all of  the stocks (or other assets) held by the fund. It’s a great (sometimes inexpensive) way to buy a collection of stocks instead of selecting individual stocks. With many brokers, trading an ETF is cheaper than trading the stocks or commodities directly.

With an ETF, you can also be involved in certain sectors of the market.

For example, if you feel the energy sector is due for a bullish run, instead of buying individual stocks, a trader could buy the XLE ETF (energy sector ETF) which contains a basket of 24 stocks including Exxon, Chevron Corp, and Kinder Morgan. All stocks are not weighted the same and Exxon and Chevron make up 45% of the ETF in terms of influence on the price action.

Want to track the entire S&P 500 Index?  You’d want to take a look at a market ETF such as the SPDR (SPY).  Want to focus on a specific country?  There are ETFs for those as well.


What Is Swing Trading?

Swing trading is generally described as type of trading that attempts to capture gains in an instrument over a period of days. Swing traders usually hold their positions for several days and try to take advantage of short-term price fluctuations.

Compare that to a day trader who looks to exit their position by the end of the trading day.  For a more extreme example, think of a scalper who lives in a world of seconds to minutes.

I consider swing trading to be more about trading a “with trend” swing and exiting before price reverses against me. Whether that means holding for a day or several weeks, the impulse swing is where I want to be involved.

In order to be successful, swing traders need to have a good understanding of technical analysis and the overall trend of the markets. This is not to say that trading against the trend is to be avoided (counter trend trading) but inexperienced traders would be better served by trading with the overall trend.

Many swing traders use technical analysis to find trading opportunities. Technical analysis can be used to identify support and resistance levels, as well as trends. Whether a trader uses indicators, price action, and/or chart patterns, it all falls under the title of technical analysis.

On our blog, there are more than enough tutorials on technical analysis. Dig into them and determine your approach to the market.


Why Choose To Swing Trade ETF’s

When it comes to swing trading, exchange traded funds offer a number of advantages over stocks. ETFs are more diversified, liquid, and lower cost than stocks. Swing trading with ETFs can give the opportunity to earn consistent profits in the market while minimizing your risk.

The main advantage of ETFs over stocks is that they are more diversified. When you swing trade with ETFs, you are essentially trading a basket of assets as opposed to an individual instrument. This diversification can help to reduce your risk and increase your chances of success.

For example, I could be trading a bank stock and if it’s declining, I could be heading for a loss. However, if I was trading the XLF (financials) ETF, it may be rising as other stocks in the basket are doing well.  With an ETF, you don’t rely on one stock to go in your direction.  That said, the weighting does make a difference.  If Exxon stock is falling, the energy sector ETF may have issues gaining upside traction.

Another advantage of ETFs is that they are more liquid than stocks. This means that it can be easier to buy and sell ETFs, without running the risk of slippage in or out.

Finally, ETFs tend to be transacted at a lower cost to trade than stocks. This can save you money in the long run and help you to earn more consistent profits.

ETF Liquidity

It’s not enough to look at the volume of the ETF when deciding which one to trade.  There are two main factors that determine whether ETFs are liquid enough:

+ Number of shares available for trading

+ Activity of traders (volume) and the liquidity of each security within the fund (makes up overall ETF liquidity)

An ETF that invests in securities that are limited in supply, will be difficult to trade.  There is no need to reinvent the wheel and most traders should stick to the more popular ETFs such as SPY, SQQQ, XLF, QQQ, EMM.

Like Stocks, But Not Exactly

While there are similarities with stocks, individual stock prices rise and fall on the bases of supply, demand and the outlook for the company.  There are only so many shares of stocks that are available (supply).  With an ETF, the market maker can create units (open-ended) so there is no supply issue.  The ETF price is based on the the value of all the securities held in the portfolio.

Swing Trading Strategies For ETF

There are many strategies that traders use for swing trading exchange traded funds (ETFs), and they can be broadly grouped into three main categories: mean-reversion, breakout, and momentum.  Trading an ETF is no different in terms of approach, than any other instrument you may trade.

Mean Reversion Strategy

Mean reversion is a strategy based on the concept that an instrument tends to cluster around a mean value – an average price.  Essentially, price tends to make exaggerated moves (large moves) to either side of the mean price and then tries to revert back to it.

While trying to go back to the average, price may overshoot and then attempt to correct back to an average price.
This is the XLK technology ETF with an overlay of the 20 period simple moving average.  I have highlighted some areas where price interacted with the moving average.  If you swing trade a price decline in the ETF back to an average price, you don’t want to short all moves to the upside.  A trader will want to find a large move unlike a recent move in the recent past.

One approach is to use large range candles, Turtle Soup strategy, or bring up a Keltner Channel with the default settings onto your price charts.

etf keltner

While we have smaller runs into the upper channel as noted by the circles (and you could certainly trade those short), the one on the right is more interesting.  You can see price has driven to new highs with multiple closes outside the channel.  A trend line break or price reclaiming the former resistance level could be an entry for a short.

Breakout Strategy

The idea behind the strategy is to enter a trade when the price breaks above a resistance level. This typically happens when there is a surge in buying pressure in the market which can push prices higher (but not always).  Some traders will monitor volume however, higher volume will, at times, show up after the breakout.

To successfully use this strategy, it is important to be able to identify when the price is about to break out. This can be done by studying past market data and using technical analysis tools.  Essentially, looking for a volatility contraction, where the range of price gets tighter, is what you’d like to see.  Once a breakout is anticipated, the trader can enter into a long position in the ETF.

This chart is using the Bollinger Band Squeeze strategy where we look to see the bands inside the Keltner Channel.

bollinger band breakout

At the black arrows, the blue BB lines are inside the black channel lines.  This shows us a compression in the volatility.  Also note with the black lines, we get a triangle chart pattern which shows us lower highs but higher lows – a compressing of volatility.  You can read this post on the triangle chart pattern to learn more about a chart pattern breakout but essentially, look to trade the break of resistance.

If the price continues to move higher as expected, the trader can then exit the trade with a profit when price movement begins to stall. However, if the price reverses and starts to move back down, the trader can exit the trade to avoid losses.

There are other ways to trade breakouts but the squeeze as shown is a method to consider.  You will need to define your entries, your exit strategy, and your overall trading approach.

Momentum Strategy

The momentum strategy is a strategy that looks to trade in the direction of the trend after a pullback (correction) in price movement.  Some traders will also consider momentum trading a part of the breakout trade as price, hopefully, is showing momentum after the break.

I consider trading the reversal out of a pullback to be more a momentum play but some will differ. Whatever works for you is what matters but bottom line, we want to see momentum in every trade we are in.

etf pullback

This is a standard trendline and when price pulls back to an area around the line, a break of the down trend line on price can be an entry.  Sometimes adding a momentum indicator such as MACD or RSI and looking for a hook in the direction you want to trade, can be your entry.  Be sure to read our tutorial on trading pullbacks to learn more about this common price pattern.


Overall, exchange traded funds can be a great option for swing trading for a variety of reasons.

They offer traders the ability to trade a wide variety of underlying assets, and can be traded using any number of different strategies. When choosing an ETF to swing trade, it is important to consider the fees associated with the fund, as well as the liquidity and volatility of the underlying asset.

ETFs can be a great way to get exposure to a variety of markets, and swing trading provide traders with the flexibility to trade around their schedules.

When swing trading exchange traded funds, there are a number of different strategies that can be used that fall under breakouts, momentum, and mean reversion. There is not one perfect strategy for swing trading ETFs, and it is important to experiment with different approaches to find what works best for you.

Ultimately, the most important thing is to have a well-defined entry and exit strategy that has a positive expectancy over time, and to stick to your plan.

Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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