We love hearing from our readers when they have questions about exchange traded funds (ETFs) or the trend-following strategy. This reader had specific questions about when we buy ETFs, when we sell them and how we choose them.
1. Is the 200-day moving average the SMA or EMA?
We use the 200-day EMA. What’s the difference? The simple moving average (SMA) is calculated by tracking the price of a security over a particular time period. The exponential moving average (EMA) involves a trickier mathematical formula which puts greater weight on the most recent price movement rather than an equal weight over past 200 days. The moving average you choose is a matter of personal preference, but the EMA is consistently closer to the actual price, which is why we use it.
2. When selling an ETF after it declines 8% from a high, do you set an 8% trailing stop loss order at the time of purchase?
Yes, this is what we do. A trailing stop loss order is when the stop loss is set at a fixed percentage below the market price. As the market price rises, the stop loss prices rises proportionately. If the price falls, the stop loss stays in place.
3. How do you determine when you buy an ETF back once the 8% trailing stop loss triggers?
Cash obtained from the sale of an ETF is considered a free agent – it can go anywhere you’d like it to, as long as the trend is there. Look at other sectors, asset classes and global regions – is anything else trending in the right direction? We have a daily report we use to track the 800-plus universe of ETFs, and we use it to spot these trends and help determine areas we should be exploring further.