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SwingKong01
07-11-2014,
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.

HarryAloof
07-11-2014,
Wolf,

Why does it not pass the common sense test? It looks to me like you're buying the fund if it is trending higher and switching to cash when trending lower. Why does 9% surprise you? Perhaps you could look at a years worth of trades by hand and examine what's going on?

What sectors are you rotating between?

Brian Johnson at Trader Edge has a sector rotation strategy between I think 5 sectors, cash, large cap, commodities, metals and something else, I think. http://traderedge.net/order/aar-strategy/

I've also seen rotation among the 9 S&P 500 sectors: http://SectorSpdr.com

Care to share more of your work?