Simple Market Timing Composite Strategies
Why use multiple timing systems?
Diversification of Strategy
Some timing systems temporarily under perform the market. Some simply stop working. Often the best performing system in one year will be a loser the next year. And so on. This is why it is imperative that you do not rely too heavily on a single system.
Instead, you should pick a number of good systems and devise a strategy based on the set of systems. The majority of your systems will continue to outperform the market and make up for the few that do not perform well.
Another huge advantage of using multiple timing systems is that drawdowns are minimized. A fine timing system may experience a 20% drawdown during real-time trading. If you are only using that one system and you are trading Rydex Nova (which returns 150% of the SP500 return), your drawdown will be 30%.
On the other hand, if you are using five timing systems and one experiences a 20% drawdown, your total account drawdown due to this system will only be 4%. Each of your timing systems will experience their individual drawdowns at different times thereby drastically reducing your overall account drawdown. This drawdown reduction makes sticking to your strategy easier.
Implementing A Timing Strategy With Multiple Timing Systems.
At ULTRA we call multi-system strategies, Composite Strategies. Developing a Composite Strategy isn't difficult. But, finding the perfect combination that will perform the best in real-time is not possible since the future is unknown.
Here's a step by step method for developing a strategy.
How often do you want to analyze the market?
There are basically three viable options.
- Weekly. You can do very well making your trades on a weekly basis with very little time investment. You can perform your analysis over the weekend, make your decisions and ignore the market until the next weekend.
- Daily (next day). You can increase your returns by analyzing the market each night and making your trades before the end of the next trading day. This allows you to use some systems that trade too often for weekly use.
- Daily (same day). This strategy is the most difficult to implement but may be worth the effort if you manage a large amount of capital. To implement this method you have to use numbers that are "near-close" at 3:45 PM EST and make your trades before the market closes, or the same-day trading deadline of your mutual fund company.
Determine how many systems to use to make your decisions.
For example, if you have $100,000 to invest you may want to use 10 timing systems to give you proper strategy diversification.
Determine how to allocate your capital to each system.
The simpliest case is linear allocation which would simply assign 1/10th of your capital to each system. Your possible overall positions would be 0%, 10%, 20%, 30%, 40%, 50%, 60%, 70%, 80%, 90%, 100% invested depending on how many of your timing systems were on buy signals.
With ULTRA's Historical Analysis (Composite) feature, you can model any combination of systems with no limits on complexity..
Determine which systems to use.
Now it's time to pick your systems. There are a few criteria to consider:
- Total return. Obviously you want the pick systems that have performed well historically.
- Drawdown. Since you are diversifying with multiple systems this is not as important as usual. Some very good systems have high drawdowns because of a single missed top somewhere in history. A failure of one sell signal should not disqualify a system from consideration.
- Frequency of trading. This is very important. Some systems trade too often to be used effectively for weekly trading. Some, such as MCO-ST are only suitable for Same-Day trading.
Choose your investment vehicle.
As I've said before I consider this choice secondary to your timing strategy. It's very easy to find funds that outperform the market when the market is rising. Here's some ideas:
- Use an index fund such as Rydex Nova which returns 150% of the return of the S&P 500. (Rydex 800-820-0888). Highly recommended.
- Another good option is Profunds (888-776-3637). They offer even more leverage against the S&P500 and NASDAQ 100 in both directions (long/short). ·
- You could use trendline analysis of the Nasdaq 100 index vs. the S&P 500 Index (NDX-RS). Switch to an Nasdaq 100 index fund when the OTC-RS breaks above a horizontal or downtrending resistance line. Switch into an SP500 index fund when horizontal support or an upsloping support line is violated. Be careful with steep sloped lines. They are less important than more gradual or horizontal lines. This type of analysis isn't mechanical, but is highly effective at predicting whether or not the Nasdaq 100 will outperform the market.
- Another option that we highly recommend is to have multiple strategies each trading different assets based on your personal risk exposure.
As you can see, implementing a multiple timing system composite strategy can be a bit involved. However, you can rest assured that a simple strategy of 10 weekly stock market systems with linear allocation, invested in Rydex NOVA is far more sophisticated than 99% of investors and most professional money managers.