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View Full Version : Question about my rotation strategy



saqib01
07-08-2014,
I have developed a rotation strategy that I'm quite happy with. This is not a day trading scheme, it is simply an evaluation tool that chooses one out of x funds based on fund-specific EMA and ROC parameters. Nothing new or unique, but it's mine and I'm pleased. I don't expect miracles but enjoy the idea of results comparable to buying and holding equities with much lower draw downs. It is relatively simple with only 5-20 trades per year based on 20 years of back testing.

However, I still have doubts - and here is an example of why and where I could use some help:

I have been looking for a combination of ETFs and parameters to enter in my tool that produces a better short-term gain than cash or short bonds (SHY) but with very little drawdown. A cash alternative basically. Bond ETFs do not model well at all - short, long, intermediate, gov't, corporate, int'l - you name it. Bond ETFs simply do not perform well in a trend following rotation tool, or at least not in mine. With one crazy exception and this is where I'm baffled:

Take VWEHX - Vanguard's junk bond fund. Daily, compare it to its 15-day EMA. If the price of VWEHX divided by the 15-day EMA is greater than 0.02%, then buy/hold VWEHX. When VWEHX divided by 15-day VWEHX EMA is below 0.02%, then switch to cash. After a trade, hold for a minimum of 5 days (optional rule).

My back test shows this strategy consistently generates a CAGR on the order of 9% with a maximum drawdown of 3%. This does not pass the common sense test for me - something must be wrong. It doesn't matter what period or duration I run my back-test - 3 years, 10 years, 20 years - it's all similar.

What's my flaw? I do not own any commercial backtesting tool - if someone has one that could easily run this and post their results, I would be forever grateful.