Market Timing Strategies
Updated: May 30, 2020
One commonality in our strategies is the inclusion of a market timing component. This could be a signal to go into cash or reduce position size or enter a ‘safe’ MF. This applies to swing trading strategies, monthly rotation strategies and Tactical Asset Allocation strategies.
There have been a handful of market timing methods we have been wanting to test and compare with my current 200-day moving average version.
We collected enough of them to test all at once and to compare the results. So, let’s take some time out to compare 7 different market timing strategies today.
-Last trading day of the month
-Market timing gives a buy signal
-Enter on next Open
-Last trading day of the month
-Market timing gives a sell signal
-Exit on next Open
#1 200 DMA The 200 Day Moving Average is a very commonly known Strategy. So, without any further delay… Trade Set Up - Buy signal: Close is above 200 Day MA Sell signal: Close is below 200 Day MA
#2 200 DMA 5 Days This is a slightly altered version of the 200 DMA Strategy. Trade Set Up - Buy – Close is above 200 Day MA for 5 Days Sell – Close is below 200 Day MA for 5 Days
#3 1% Band
Now, for the third way of using Moving Averages to figure out the market timing… Trade Set Up - Buy – Close is 1% or more above 200 Day MA Sell – Close is 1% or more below 200 Day MA
#4 Golden Cross The Golden Cross Strategy, also popularly known as the Trend Following Strategy, depends on two Moving Averages crossing each other. Trade Set Up - Buy – 50 Day MA is above 200 Day MA Sell – 50 Day MA is below 200 Day MA
Let’s try something next that does not depend on Moving Averages, if you will?
#5 Jay Coppock This timing strategy, when you come across its title, is also said to be “the only indicator you will ever need.” It’s tempting to try the idea out… Trade Set Up - Coppock Guide – The sum of a 14-month Rate Of Change and 11-month Rate Of Change, smoothed by a 10-period Weighted Moving Average Buy – Coppock Guide Closes this month above its level of 3 months ago Sell – Coppock Guide Closes this month below its level of 3 months ago
#6 13-Week High/Low The 13-Week High/Low strategy can be applied like so- Choose a trading universe and count the number that are making 13-week highs; call that number ‘H’. The, count the number that are making 13-week lows; call it ‘L’. The hi-lo-indicator will be a 40 Day MA of [(H-L) / no. of symbols] x 100! Trade Set up - Buy – When hi-lo-indicator goes above 5 Sell – When hi-lo-indicator goes below 5
#7 Canary Exhausting the list of 7 strategies with a rather simple idea seemed like the way to go! The Canary strategy depends on returns… Trade Set Up - Momentum Indicator – 12 x (1-month return) + 4 x (3-month return) + 2 x (6-month return) + (12-month return) Buy – When Momentum Indicator goes above 0 Sell – When Momentum Indicator goes below 0
The Conclusion Here is a list of all the 7 strategies mentioned in this series, including all the statistics that will help in drawing a fair comparison. Taking the raking for each method for each statistic, we then add them up to see which ranked best overall.
As you can see from the system drawdowns, most asset allocation models are doing a good job at reducing the risk, however only the Canary and Golden cross strategies do well on a return to risk basis.
Want to back-test your trading idea? Want your strategy evaluated? Contact us at email@example.com
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