Model portfolio - Trend Following


The trend following portfolio holds the same assets in the same proportion as the buy-and-hold portfolio - it is equally weighted among 3 ETFs - SPY, QQQQ, ADRE.

Since the purpose of the experiment is to compare the buy-and-hold strategy to market timing, we decided to have two identical portfolios - so the difference between their performance can be attributed only to the manner of trading, not to portfolio composition.

To keep things as simple as possible, we will also adopt a very simple money management procedure - we will enter the market with no less than 33% of the total capital but also no more than 100%. We will NOT use margin in either buy-and-hold or trend following portfolio.

Definition of a Trend

Portfolio will trade in the direction of the market trend, with uptrend always resulting in an entry into the market ( subject to entry rules below). The downtrend may or may not result in going short - we will in most cases stay in cash, unless we can't help ourselver :-)
How do we define a trend?
We will use one of the simplest definitions - 200 day moving average of the closing prices.
If price of an index at a close of a trading day exceeds the 200 day moving average of the closing prices for this index, we will say that this index is in an uptrend.
If price of an index at a close of a trading day falls below the 200 day moving average of the closing prices for this index, we will say that this index is in an downtrend.

TRADING RULES

Entry
1. We will enter the market if the prices of at least 2 of the 3 indexes are at or above their respective 200 day moving average (average of the closing prices for the past 200 trading days).
2. If condition 1 is satisfied, we will enter the market, allocating 1/3 of the total capital to each index which has crossed its 200 day moving average.
3. If at some later date, the remaining index crosses above its 200 day moving average, we will use 1/3 of the original capital to buy shares of that index.
4. If at least 2 out of 3 indexes remain below their 200 day moving average, we shall stay entirely in cash.
5.If all 3 indexes are below their 200 moving average, we may elect to short any one of them - or stay 100% in cash.

Exit
We will exit the market if any of the following happens:

1) if an index drops below its 200 day moving average for longer than 5 trading days - we will sell all shares of that index
2) if an index drops 20% from its high (measured from the day of our purchase of that index), we will sell all shares of that index
3) if on any trading day, an index suffers a 5% decline, we will sell all shares of that index
4) if in any month the portfolio suffers a 15% decline, we will sell all shares and go to 100% cash
5) if other conditions occur which we deem dangerous enough to the portfolio equity, we shall sell all shares and go to 100% cash - and give you an explanation on this page.
6) Rules 1-5 will apply to short positions as well (though obviously, in reverse).

Current status
Since 2 out of 3 indexes are below their respective 200 day moving averages, by entry rule 4, the trend following portfolio remains 100% in cash

 

 


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