Is Swing Trading ETFs Right for You?

Swing trading sits in an interesting position between day trading and investing.

Day traders go home “flat” with no exposure to overnight risk, but that means they are missing out on longer term price action which limits upside potential. It also means they need to start the process over again and again.

In exchange for missing out on bigger moves, day traders eliminate being caught on the wrong side of an opening gap. They sleep better starting fresh every day, the downside of this benefit is that it can be exhausting.

Investors lie at the other end of the speculating wheel. Many don’t watch daily quotes and are focused on annual performance, not recent price action.

Swing trading is different. Unique in a way that you get the best of day trading and investing. You can position yourself to hold trades for days or even weeks, but you are generally not exposed to earnings surprises. More often than not you will trade around them.

The one tremendous downside risk to swing trading is an adverse gap on the open. Individual stocks present this risk each and every time you intend to hold a trade more than one day. The difference in mindset from a longer term investor is risk management. You are managing risk on a tighter and shorter term scale as a swing trader.

This can make getting whipsawed a regular occurrence. One that can be very frustrating. So how do you reduce this scenario, not day trade, without intending to hold long term?

ETF Basics

If you have the knowledge, smart stock picking can outperform the market. The problem of unexpected announcements and large gaps against you still exist even if you are the best swing trading stock picker on the planet.

Don’t get me wrong, swing trading stocks is a terrific business opportunity, today we are merely offering an alternative to consider if you don’t have the time, skills or risk tolerance to research and swing trade stocks.

If you don’t, ETFs provide a cheap and accessible way to diversify a portfolio. Whether an ETF tracks an industry or an index, there are many shapes and sizes that match your goals and resources. A huge advantage as well is they are less susceptible to adverse gaps.

However, these seemingly safe choices can lull you into a false sense of security. After all, because an ETF holds many different stocks, it is automatically less risky than picking an individual stock — right?

Not quite. You may choose ETFs because you don’t believe you have the time or the expertise to perform the research on individual stocks — but is choosing a basket of stocks without doing research on each of them really any safer? The answer is no.

If you don’t know the current trend of an ETF’s holdings, you don’t know the true risk of that ETF. Before you jump into an ETF swing trade, you need a plan to analyze the top holdings of the ETF.

Most ETFs have major holdings that represent the dominant allocation to the fund. Your objective and plan when looking for an ETF to swing trade, is first identify an opportunity in the fund itself, then confirm the top holdings are showing the same scenario.

This comprehensive process gives you confidence and solid opportunity when they are in sync, and reduces volatility associated with individual stocks.

While smart stock picking can lead investors to outsize returns, many people do not have the time or the risk appetite to pick their own stocks. ETFs provide you an affordable and accessible way to diversify a portfolio. I say “affordable and accessible” because they generally have lower total fees than a mutual fund and are designed to be liquid; which means they are a trading vehicle unlike mutual funds designed to be held longer.

Whether an ETF tracks and industry or an index, there are multiple options to suit your portfolio’s needs.

ETFs are Professionally Managed Portfolios

Some traders choose ETFs because they don’t feel they have the time or the expertise to perform due diligence on individual stocks. This is a valid thought process. But what if you want to find the best stocks but don’t know how?

What if you want to be a stock picker?

The simple plan is to first scan ETFs that are outperforming the market. From this curated list of ETFs dig into their holdings and uncover the best performing stocks in the fund. This process is very similar to a relative strength paly using the general market and then finding stocks to swing trade. In this case you are finding a specific ETF with stocks to trade

There are positives and negatives to weigh when stock picking. The main consideration is overnight risk, gaps to be specific. If you have less time and or knowledge, an ETF swing trading plan could be the best fit for your resources.

If you don’t have the expertise but still want to swing trade stocks, the process we just reverse engineered for you from ETF to ETF holdings is tailor made for you.


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