Swing Trading: How to do it Using ETFs

Exchange Traded Funds (ETFs) is regarded as one of the safest means of trading. This happens because of a number of reasons such as: liquidity, safety, and low commission regime.

Liquidity comes because of the huge number of participants in the ETF market while safety comes because of the diversification aspect of ETFs (often being compared to mutual funds).

ETFs are viewed as long term investments but many swing traders are using these instruments to make money (see here to know your trading style). They also have extremely low expense ratios.

To date, there are more than 1,600 ETFs which gives swing traders excellent opportunities to allocate their money.

Day Trade ETFs: Complete Guide

Traders have been practicing swing trading for years. Some of them have become very experienced and successful in it while many of them have failed.

Swing trading is a strategy where traders attempt to capture a profit from an ETF price move within a very short time frame. It is also known as day trading. The main idea behind it is to enter and move from a trade as soon as you have attained a profit.

For this reason, while fundamental analysis is a good method to study the market, most swing traders depend on technical analysis to enter or leave trades.

 Learn When to Enter and Exit While Trading

Selecting a good ETF

As stated above, there are more than 1,600 ETFs one can chose from. Some of these ETFs include: government bonds, corporate bonds, stocks, and commodities among others.

For swing traders, selecting the right ETF is the first most important thing you should know because of liquidity issues. For instance, corporate bonds ETFs are less liquid than equity based stocks.

In addition, some sectors of equities are more liquid than others. For instance, technology based ETFs are more liquid than the material one.

Apart from liquidity, it is important to look at the past performance of the ETF, because this will give you a good indication of what to expect.

Some of the most common ETFs for day traders, among others, are:

  • United States Natural Gas Fund
  • Industrial Select Sector SPDR
  • S&P 500 VIX Short-Term Futures
  • ETN and SPDR S&P 500 ETF

Swing Trading the ETFs

A good ETF trading strategy involves identifying the most liquid categories and then narrowing the search to 4. We recommend using only 4 ETFs on a daily basis because it is easier to analyse and follow up.

In every trading day, some sectors will perform better than others. This is known as the relative strength whose goal is to find a good ETF to buy and a weak ETF to short. On a daily basis, We recommend that you list the above ETFs in a table and identify 2 best and 2 worst performing ones.

To do this, use the percentage scale instead of the numbers. We recommend this to be done at 10 AM or during the premarket. After listing these ETFs, find the best and worst performing and shift your focus towards this. Now you have 4 ETFs which you will trade with during that day.

This should take less than 2 minutes to do.

After identifying the 2 strong and the 2 weak ETFs, you should go ahead and go long in the former 2 while shorting the latter.

Short and Long Example

The chart below shows a short on the Energy sector ETF.


The chart above shows a one-minute of XLE (energy ETF) which is in a downward trend. As seen in the chart, the ETF has just touched a new low and then rallied back to a descending trendline.

In the chart, We sold when the price touched $0.02 below the new low (consolidation low). Then, We placed a stop loss $0.02 above the new high and a take profit which provides a profit of 1.6 times the risk.

A good example is when the risk is $0.17. Here, you should place a target that gives a $ 0.27 profit. In this case, if the target is way much below the previous swing low, you should avoid the trade.

If the target is above the swing low, you should expand the target at least 2 or 3 times the risk.

Many traders are now appreciating the need and simplicity of trading using ETF. These funds play a very critical role in ensuring that traders avoid liquidity risk. They also ensure maximum diversification for the trader.

However, it does not remove the entire trading risk in the trades. In fact, many people have lost significant resources by investing in risky ETFs. Therefore, it is important to conduct some research when selecting the ETF vehicle to use.

3 Steps to Effective Technical Analysis

Useful external resource to use ETF while Swing Trading

  • 3 swing trading strategies to profit - ETFTrends
  • Best ETFs for Traders and Speculators - Forbes

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