This post is about a revised rotational trading system. I’m a big fan of rotational trading. Please read the first post to get more about the why. While I DON’T think rotational trading is better than the system types that buy into weakness and sell into strength, I do think it’s an excellent way to diversify your trading systems. A while ago I had two posts (first / second) on rotational trading, since then I continued my research and further worked on my database. So the system I’m going to present is build on a survivorship bias free database, hence it carries a lot more validity than the previous version.
- The system is only going to be traded when the NASDAQ100 idx is above the 20 or 200 days moving average. To say it in other words, the NDX100 has to be bellow 20 or 200 days moving average in order to prevent execution.
- Yes I know, some of the key elements of rotational trading is to avoid market timing. However, from an emotional point of view I find it incredible difficult to execute long trades under these circumstances.
- As previously, I’ve used TSI to measure trend strength. We only want to be invested in strongly trending stocks. Remember, TSI only measures strength of the trend and not direction.
- For trend direction i suggest to use a simple ROC(200). The value of 200 isn’t optimized. Doing some optimization you might get better returns, but it’s good enough for me.
- You might want to use only the absolute value of the ROC(200). When the market is rebounding after an extremely sharp sell off, it’s better to buy oversold stocks.
- Once you get the two scores, you have to combine them in order to get one unique rank.
- NASDAQ 100 stocks
- Top five stocks, rebalanced weekly (Friday)
- 20% capital
- Bellow you find the results from January 2001 to September 2010. I like to exclude the crazy NASDAQ times from 1999-2000 as I think they have been extremely unusual on either side.
- No commission or slippage calculated
- Database includes delisted stocks, index constitution is revised at day of change.
- The impact of survivorship bias (link): I re-run the same system based on a database with survivorship bias. Basically i used the NDX100 index as of today. The systems shows better performance, of course: CAR: 62% with a slightly lower draw-down
The simple system presented delivers decent performance and a good starting point for your own research. Past results are no guarantee for future returns. I do NOT trade the system as presented here. Do your own research. In case you can’t or won’t do your own research, then follow David Varadi from CSS Analytics. Every week David posts his Top10 picks for the coming week. This year his picks have outperformed the index by about 10% and there are still three month left.
The AmiBroker code is extremely tricky this time, because AmiBroker doesn’t support the ranking approach as presented.