For instance, at ETF Trends, we try to stick to three rules that should help keep most investors out of trouble: First, investors should maintain an 8% stop-loss on ETF positions. Second, people should keep an eye on the trend – if an ETF dips below its 50-day average, investors should begin to monitor holdings more closely, and if the ETF falls below the 200-day average, then it is time to sell. Lastly, don’t chase after hot areas of the market.
The first and perhaps most important screening process for ETFs is knowing the 200-day moving average of each candidate and where it stands in relation to it. We look for uptrends, and then examine those trends using fundamental analysis. Once a position is entered, we stay in the investment until the trend turns sour or declines below its trend line.
In some cases, where trends have moved steeply to the upside, the corresponding ETF may be more than 10% above its moving average. In those cases, we impose an 8% stop-loss. If you buy an ETF trading 15% above its 200-day moving average, it’s best to sell if it drops 8% from a recent high. That way, you take control of when you are leaving position and preserve as much profit as you can.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.