Simple etf trading system
There are many papers supporting the concept of momentum investing and relative strength investing. Now in its fourth edition, O'Shaunessey found that relative strength strategies were consistently at the top of the performance list. Investors are rewarded for buying the strongest stocks and avoiding the weakest. The strong tend to get stronger, while the weak tend to get weaker. This makes sense because Wall Street loves its winners and hates its losers.
This strategy worked for 1-month, 3-month, 6-month, 9-month and month performance intervals. Furthermore, Faber also found that performance could be improved by adding a simple trend-following requirement before considering positions. The strategy described here is based on the findings in Faber's white paper. First, the strategy is based on monthly data and the portfolio is rebalanced once per month.
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Chartists can use the last day of the month, the first day of the month or a set date every month. This basic timing technique ensures that investors are out of the market during extended downtrends and in the market during extended uptrends. Such a strategy would have avoided the bear market and the gut-wrenching decline in The next step is to choose the performance interval.
Chartists can choose anything from one to twelve months.
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One month may be a little short and cause excessive rebalancing. Twelve months may be a bit long and miss too much of the move.
As a compromise, this example will use three months and define performance with the three-month Rate-of-Change, which is the percentage gain over a three-month period. Chartists must then decide how much capital to allocate to each sector and to the strategy as a whole.
Faber and O'Shaunessey
Alternatively, investors could implement a weighted strategy by investing the most in the top sector and lower amounts in the subsequent sectors. Rebalance: Once per month, sell sectors that fall out of the top tier three and buy the sectors that move into the top tier three.
The Sector Summary at StockCharts. The nine sector SPDRs are shown on one convenient page with an option to sort by percentage change.
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Faber's Sector Rotation Trading Strategy
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