System" work for day trading?
No, it is an end of day trading tool that was not designed to isolate
the very short term imbalances that are needed for day trading. Day
trading is not for the occasional trader or for the investor. It is a
very intense process that requires the trader's undivided attention.
Anything less will see the trader and his/her money quickly parted.
Can stocks, futures or
options be used in place of mutual funds and ETFs?
Market correlation of the trading or investment vehicle is an important
factor in the success of The System. Since the timing functions are
based on the stock market, large deviations away from it would render
the timing portion irrelevant.
Stocks are affected by the market to some degree, but are primarily
driven by other factors including company specific and industry
specific events and perceptions. Futures and options are highly
leveraged and have a time component that makes them less than ideal as
trading vehicles in a trading system that is intermediate term
oriented. Leveraged ETFs might be a better choice.
Mutual funds, including ETFs, are the preferred investment vehicle.
They allow the trader or investor instant diversification, an important
factor in the risk avoidance part of the trading model. Mutual funds
are easily bought and sold with minimal to no transaction fees, as long
as sales loads are avoided. Think of them as "baskets of stocks" that
can be analyzed, charted and compared to each other in the search
for the optimum investment vehicle at any given point in time. Picking
the right stocks takes a lot of time and research. Let the fund manager
do that, we'll just pick the fund with the most potential.
Wouldn't I be better off
using a trading system that was designed to use futures and options or
even stocks over much shorter time horizons?
It is true that the shorter the time horizon and the higher the level
of volatility, the greater the chance for maximum return. Short time
horizons accommodate more frequent trades which can capitalize on the
enhanced volatility of leveraged vehicles such as futures and options.
The problem is that predictability declines dramatically as the time
horizon shortens. The shorter the time focus, the greater the
percentage of directional errors. The higher the leverage, the greater
the penalty for those errors. Some traders can thrive in this type of
environment, but the vast majority fail miserably.
The key to maximizing long term investment and trading success is to
optimize the risk vs reward relationship. The System is designed to do
just that. By focusing on an intermediate term time horizon it can take
advantage of good market predictability to minimize directional errors
while still being able to accommodate frequent enough trades to enhance
return. The selection component of The System can further enhance
return by investing in the dominant areas of the market without
necessarily increasing risk. Perhaps, one of the most important
features is that it does not require the constant attention to the
market that day trading requires. The System is intended to fit in with
most lifestyles, which is an essential component of the success of
any program. It can't work if it is not used.
Does The System work
with sector funds?
As long as the sector funds correlate reasonably well with the market
they can be used. The more focused the sector fund is, the less
correlation it will typically have. Technology funds usually work well,
but a semiconductor fund probably would not be a good choice, because
of a lower level of market correlation.
Sector investing requires a shorter term focus that increases
directional error and must rely on indicators that are less reliant on
the general stock market. The trading rules become more complex and
require a higher level of involvement that exceeds the levels intended
for The System. We may consider releasing a sector model at some point
in the future.
Can The System use a
short strategy when the market is in a bear market?
At this time only a long strategy is used. Short selling, or buying
mutual funds or ETFs that have a negative correlation to the market, is
a very risky strategy. Stocks are in a bull market two thirds of
the time, so the odds are 2 to 1 that the market will rise. Taking a
short position puts the trader at a 2 to 1 disadvantage. That being
said, there is great opportunity in taking short positions during major
bear markets. We may consider adding an optional short strategy to The
System in the future.
Which is a better
investment vehicle mutual funds or ETFs?
The System was originally designed to use actively managed equity
mutual funds in a well rounded mutual fund family. The family concept
was beneficial from the standpoint of providing a variety of funds that
attempted to cover a wide variety of approaches with minimal overlap of
styles. Having an active manager often was a short term benefit as they
could overweight the fund with stocks that they felt would outperform.
If they were right, odds are The System could pick up on it and
performance could be enhanced by selecting the dominant fund within the
group. In the long run, from a buy and hold stand point (which history
over the last decade has shown to be a poor way to build wealth), index
funds tend to out perform their managed counterparts. ETFs are for the
most part passively managed index funds.
As time progressed, mutual funds began imposing excessive trading
restrictions to the point where many of the good fund families are no
longer a fit for The System. Unless mutual funds relax their trading
restrictions, ETFs will probably become the preferred trading vehicle.