By Bill Poulos
This article originally appeared on Traders Reserve.

When it comes to trading exchange-traded funds (ETFs), I believe the best approach is to swing trade. “Swing trading” generally describes a trade with a duration lasting a few days to a few weeks, using daily charts. In comparison, “position trading” refers to a trade with a duration of a few weeks to months. And then, of course, there is “investing,” which typically involves holding a position for months to years.

Swing trading gets its name from putting on trades that attempt to capture swing moves typical of a bull market from a swing low (when the market corrects down after a sustained rally, and then begins to go up once again) to a new swing high, which would mark the end of the new rally. Or in a bear market, where the market makes a swing high (when the market rallies up after a sustained move down, and then begins to go down once again) to a new swing low, which would mark the end of the new leg down.

Here are four reasons I believe that swing trading is the best strategy for trading ETFs:

1. Greatest Gain for the Time Invested

I believe that the trader has the opportunity to achieve the greatest gain for the time invested, meaning that only end of day data is considered in making trading decisions and, consequently, it is not necessary to sit in front of a computer all day long during market hours. Swing trading is not day trading, and that means you are free from having to watch your trade positions constantly or review chart patterns every hour.

2. More Efficient Use of Trading Capital

With swing trading you have the opportunity to use your account dollars more efficiently. You can deploy capital for shorter periods of time and be nimble enough to change directions or sectors depending on market conditions. For example, if it were possible to gain 10% in one trade lasting for three weeks, and then redeploying those same funds in the next trade opportunity, wouldn’t that be better than tying up those same funds for a one-year trade that yielded 10%?

3. Tighter Stops

I believe you can use much tighter stops than is possible for methods aimed at longer trade durations. In longer-term position trades or investing, you need to put on stops with larger percentages (10% or more) to guarantee you don’t get whipsawed in and out of a position or a long-term holding. ETFs trade like stock giving you more flexibility while the swing trade time frame allows you to run tighter stops.

4. Low Expense Ratios

ETFs have much lower expense ratios than mutual funds or hedge funds. Expense ratios can range from a 25 to 100 basis points making them similar to stocks. That makes swing trading ETFs much more manageable and profitable than holding for an extended position trade or long-term investment.

Powerful Risk Management Strategy

As is the case with all trading, it is very important to have a simple but powerful risk management strategy. Not all trades will be profitable — that is the nature of trading — and so you must have a strategy to exit each and every trade you put on before you enter it.

The Portfolio Prophet System provides these entry and exit points for you once an opportunity has been identified. Learn more about the Portfolio Prophet System for FREE here.

For more trades, ideas and strategies, visit Traders Reserve.