In today’s climate, hanging on for dear life can result not only in lost money, but lost time. There are lots of uptrends out there and it’s just a matter of learning to spot them and, most importantly, acting on them.
We use the 200-day moving average to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. Having such a strategy has you in a position in time for any potential long-term uptrend, while having a point at which you sell puts a cap on your losses. [Merits of an ETF Trend Following Strategy.]
While trend following can be used with nearly any financial instrument, it’s best suited to ETFs. Stocks can be more volatile, which leads to frequent trades and increased costs. Mutual funds don’t possess intraday liquidity and many of them feature early redemption fees or investment minimums. [5 Reasons ETFs Are Better Than Mutual Funds.]
For more information on trend following, visit our trend following category. Or take a look at The ETF Trend Following Playbook.
Max Chen contributed to this article.