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Henry Ford's MARKET
SECTOR FUND TIMING STRATEGY: TO OPTIMIZE OR NOT TO OPTIMIZE? YES! The correct answer to the above question is yes in both instances. Optimization is a necessary part of the development of any system. It is also the biggest danger to the development of any strategy. Sound contradictory? Let me elucidate for all you system testers out there. The testing of a mechanical system must see it's results evaluated over some finite period of time which makes up the data set. Ideally you want to use the smallest subset that allows for testing that includes all outside aberrations, such as recessions or wars or market cycles to test the efficacy of the hypothesis. Most beginning system developers take the entire database and look to see that the bottom line result is maximized at the end of the period. What they have really done is established a set of rules specifically tailored to that particular segment of time. Believe me, this is the most basic pitfall of systems developers today. Sound system development requires the optimization of rules on the smallest subset we defined previously, and then tested exhaustively against multiple segments of data from different periods in time outside of the database upon which the system was developed. We take our testing one step farther and use an advanced method called "walk forward period" testing. Once we have established the basic premise to be tested, we use 1 year windows of observation and test the system by moving the evaluation period ahead by 1 month at a time and testing for a period 1 year forward from that new point. We repeat this process until we run out of data. In the case of our data sample, this process divided our 9 year database of fund prices ito 91, 1 year windows for evaluation. The reason for this is very simple. When you or I decide that we are going to invest in a new system, it might be this month, next month or six months from now. Everybody may have a different starting point. We need to establish that the results achieved are not based upon fixed starting points and that the system will be near equally profitable no matter when implemented. This type of testing is rare and immediately shows the flaws of a poorly designed technique. A sure sign of this lack of insight are results reported that show testing periods between two odd dates in history. The system was optimized by finding one period, irrespective of the calendar that gave the best results. The next sign of a poorly designed system is an old adage that shows that "the success of a system to perform in the future is inversely proportional to the number of rule or exclusions included." This is a false optimization technique used by those who like to throw every technical indicator from MACD to stochastics and linear regression into the mix in attempt to satisfy data aberrations which donât conform to their profit target. Rules will typically read something like: "After running the basic system, now look for RSI crossing s above 20 , except when the slow Stochastic line is above the fast Stochastic line at the same time that the ADX is declining. Ignore all of the above if it is a new moon or the target dates fall between the last three days of the calendar month and the first two days of the new month; as long as the first trading day is not a Monday." Now, I know that sounds a little far fetched, but I have actually received trading
system suggestions from developers with as many as 26 additional exclusionary rules....(you
know who you are). As intelligent beings we try to evaluate every piece of information available to justify our existence... Let common sense prevail... "KISS".....Keep it Simple Stupid! WHAT WE ARE GOING TO DO DIFFERENT! 1. Have simple rules that take into account price dynamics.(Not only recent price volatility, but evaluation of the ability of lower priced funds to make a greater percentage of profit easier). 2. Select sectors that have exhibited the best near-term price to performance ratio. 3, Allow trades to run as long as they continue to show profit potential. 4. Hold funds for the minimum holding period where possible, but cut trades short mercilessly despite penalties when called for. 5. When a sector timing exit is indicated, move into the right kind of Money Market fund so as to gain interest during non-investment periods at the highest possible rate. Sounds complicated, but we make it easy to accomplish all of the selection process yourself in just a few minutes a week. We help you with the emergency exits because that's what we do best....time the sector exits during periods of market volatility. .
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