Why ETFs are the Perfect Option for Swing Trading

For active traders who seek to swing trade, exchange-traded funds (ETFs) are a viable option to consider. These investment vehicles provide a range of benefits compared to individual stocks, such as greater diversity, higher liquidity, and lower expenses.

By incorporating technical indicators in your trading plan, swing trading with ETFs can potentially yield good returns while mitigating risk as part of your investment strategy.

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

ETF Swing Trading Strategies

There are many strategies that traders use for ETF trading 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 swing trading stock or any other instrument.

Mean Reversion Strategy

Swing trading ETFs can be a profitable strategy if you know what you’re doing. One way to approach it is to use a mean reversion strategy. This trading method is based on the idea that an instrument tends to cluster around an average price, known as the mean value. When the price moves too far away from the mean, it may make exaggerated moves in either direction before attempting to correct back to the average price.

By using a mean reversion strategy, swing traders can capitalize on these exaggerated moves and make profitable trades. It’s important to note, however, that this strategy requires careful analysis of price movements as many mean reversions that take place on the price chart, are short-lived.

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 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.

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 the price has been 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

Swing trading ETFs can also involve a strategy known as a breakout strategy. The idea behind this strategy is to enter into a trade when the price breaks above a resistance level or below support.

This usually occurs when there is a surge in buying pressure in the market, which can drive prices higher. Some traders may also monitor trading volume to confirm the breakout. To use this strategy effectively, it is important to identify when the price is about to break out. This can be achieved by analyzing past market data and looking for well-defined trading ranges.

Looking for a volatility contraction, a level of activity where the range of price gets tighter, indicating an anticipated breakout, is a great approach. Once the trader anticipates a breakout, they can enter into a long position in the ETF at the breakout price.

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

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 that 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

This approach involves trading in the direction of the trend after a pullback or correction in price movement. Momentum traders may also consider this a part of the breakout trade, as the price is hopefully showing momentum after the break.

Some traders may view trading the reversal out of a pullback as more of a momentum play, while others may have a different perspective. Ultimately, the key is to find a strategy that works for you. Regardless of the specific approach, it’s important to prioritize momentum in every trade to increase the chances of success.

This is a standard trendline and when the price pulls back to an area around the line, a break of the downtrend line on price can be the entry price. 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.

What Are Exchange Traded Funds?

Exchange-traded funds, or ETFs, are popular trading vehicle that is traded on a stock exchange. They give traders and investors exposure to a diverse range of assets, such as stocks, bonds, commodities, or currencies.

ETFs are similar to mutual funds in that they hold a basket of securities, but they trade like a stock on an exchange, making them a more convenient option. By owning a single share of an ETF, you indirectly own a portion of all the stocks or assets held by the fund. This makes it a cost-effective way to invest in a collection of stocks instead of buying individual ones.

Many brokers offer cheaper trading fees for ETFs (some offer commission-free ETF trading!) compared to stocks or commodities. For example, instead of buying individual stocks in the energy sector, a trader could buy an ETF like XLE, which track a basket of 24 energy stocks. ETFs are also available for tracking specific indices or countries, such as the S&P 500 or country-specific ETFs.

ETF VS Mutual Funds

Biggest Providers Of ETFs

When it comes to investing in ETFs, it’s important to choose a reputable provider with a solid track record. The Vanguard Group, Inc. is one such provider that stands out from the crowd.

As of January 13, 2021, they had a whopping $8 trillion in global assets under management, making them the second-largest provider of ETFs in the world after BlackRock’s iShares.

Along with BlackRock and State Street, Vanguard is considered to be one of the Big Three index fund managers.  So if you’re looking for a reliable and reputable provider of ETFs, Vanguard is definitely worth considering.

What Is Swing Trading?

Swing trading is a style of trading that aims to capture gains in an instrument over a period of days. Unlike day traders who exit their positions by the end of the trading day, swing traders hold their positions for several days to take advantage of short-term price fluctuations.

The goal of swing trading is to trade with the trend and the current swing but exit before the price reverses against the trader. 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 inside short-term price swings.

Successful traders need to have a good understanding of technical analysis and the overall trend of the markets, although trading against the trend is not always avoided.

If you are looking to use an ETF as part of a long-term buy-and-hold strategy, that is also possible.

Technical analysis is commonly used to identify support and resistance levels, as well as trends, and traders can use indicators, price action, and chart patterns to find trading opportunities. Tutorials on technical analysis are available on our blog to help traders determine their approach to the market.

Why Choose To Swing Trade ETFs

ETF Trading Tip:  ETF Liquidity

ETFs for swing trading should have ample amounts of liquidity.  Simply looking at the volume of the ETF is not enough. Two key factors that determine ETF liquidity are the number of shares available for trading and the activity of traders, as well as the liquidity of each security within the fund.

An ETF that invests in securities with limited supply may be difficult to trade, so it’s best to stick with popular ETFs such as SPY, SQQQ, XLF, QQQ, and EMM. By carefully considering ETF liquidity, traders can make more better decisions and potentially avoid trading difficulties.

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 value of all the securities held in the portfolio.

Frequently Asked Questions

Can ETFs be used for Swing Trading?

Yes, ETFs (Exchange Traded Funds) can be used for swing trading. ETFs are a popular choice for traders because they offer diversification across a range of assets, such as stocks, bonds, and commodities, and can be traded like a stock on an exchange. Not all ETFs are suitable for swing trading, and traders should carefully consider factors such as liquidity, volatility, and trading volume before making any trades.

What exactly is Swing Trading and how does it work?

Swing trading is a form of trading that involves holding positions for a short period of time, usually a few days to a few weeks, with the goal of profiting from price fluctuations in the market. This strategy is often used in the stock market, but can also be applied to ETFs (exchange-traded funds) and other financial instruments.

What is an ETF?

ETF stands for exchange-traded fund. It is a type of investment fund that is traded on stock exchanges, much like individual stocks. An ETF holds a basket of assets, such as stocks, bonds, or commodities, and investors can buy or sell shares in the ETF throughout the trading day. ETFs are popular among investors who want to diversify their portfolios without having to buy individual stocks or bonds. They are also commonly used for swing trading, a trading strategy that involves holding securities for a short period of time, usually a few days to a few weeks, in order to profit from price fluctuations.

Why are ETFs a good choice for Swing Trading?

ETFs (Exchange Traded Funds) are a good choice for swing trading because they offer a diversified portfolio of stocks or bonds that can be traded like individual stocks. This means that traders can take advantage of short-term price movements in the market without having to pick individual stocks or bonds. ETFs are also highly liquid, meaning that they can be bought and sold quickly and easily, which is important for traders who need to move in and out of positions quickly. ETFs often have lower fees than mutual funds, making them an attractive option for cost-conscious traders.

How to Exit an ETF Swing Trade

Exiting an ETF swing trade involves several steps. First, you need to identify your exit strategy before entering the trade. This includes setting a stop-loss order to limit potential losses and a profit target to take profits. Once you have entered the trade, monitor it closely and adjust your stop loss and profit target as needed based on market conditions. If the trade reaches your profit target, sell the ETF and take your profits. If the trade hits your stop loss, sell the ETF to limit your losses. It’s important to have a clear exit strategy in place before entering any swing trade, as emotions can cloud your judgment and lead to poor decisions.

ETFs For Swing Trading Conclusion

Swing trading ETFs can be a profitable strategy for those who are willing to put in the time and effort to research and analyze the market. With the right tools and knowledge, you can take advantage of short-term market movements and make informed trades.

Remember to always practice risk management and stay disciplined in your approach.

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