When you purchase an exchange traded fund (ETF), you’re eventually going to have to sell it someday. Having a stop loss in place could be your guide as to when exactly that is.

Bob Pisani of CNBC praises their ability to enable investors to use them and exercise stop losses.  He states stop losses are beneficial for the following reasons:

• They minimize losses or could act as a backstop for gains, which prevents one’s gains to be entirely eaten up
• They enable you to automatically sell at a specific price below the current market price
• They are easy to utilize, in that they can be placed with a regular broker and as soon as the price of your ETF falls below your stop loss price, it is sold

We agree with him and believe that having an investment strategy is the way to go, both for entry and exit. Having stop losses helps investors stop the bleeding, removes the emotional part of investing and puts a cap on the amount that one can lose. Our own strategy uses an 8% stop loss.  If an ETF falls 8% off its recent high or drops below its 200-day moving average, we sell it.

For more stories on strategy, check out our trend following category.

Kevin Grewal contributed to this article.

Tags: ETF 101, Mutual Funds, Trend Following