How To -- Trading Strategy

There are several ways of using fund rankings to develop investment strategies. The basic concept is to always stay with the top ranked funds in different market conditions to benefit from the upward movements of the funds. One of the approaches I adopted and applied in the model trading portfolios is to hold one top rank fund at a time and switch to another top rank fund when its rank drops below 7th rank in the family or if its AMI drops below 0. It is important not to hold a fund with negative AMI. A fund is in an intermediate up trend when its AMI climbs above zero, and is in a down trend when its AMI slides down below zero. In a severe bear market, all the AMI’s in the fund family will drop below zero. By selling funds with negative AMI's, one can avoid the inevitable severe bear market in the future

By changing the number of funds to hold or using different trading thresholds, strategies with different diversification levels or aggressiveness can be developed. For example, a multi-fund strategy that gives better diversification can hold 2 or 3 top ranked funds at a time and a strategy with a more aggressive threshold (for example, 5^th rank instead of 7^th rank) will result in shorter holding periods and more frequent tradings. Here are a few examples of trading strategies:

Strategy A: Buy the number 1 ranked fund, hold it, and check fund rankings every week. When its rank drops below 5 or its AMI drops below 0, sell it and buy the number 1 fund of that week (of course with positive AMI.) If none of the fund has positive AMI, buy the money market fund or equivalent.

Strategy B: Divide your portfolio into 3 equal parts. Buy the first top 3 ranked funds, hold them, and check fund rankings every week. When one of the fund drops below 10th rank or its AMI drops below 0, sell it and buy the number 1 fund of that week (again, do not buy funds with negative AMI.) If you already owned the number 1 fund, buy the number 2, and if you already owned the number 1 and number 2 funds , buy the number 3 fund such that you will always hold 3 different funds in your portfolio (except for money market fund as warranted by market conditions.

Strategy C: I found this on a for subscription web site. It holds 5 equal part of top 5 ranked funds. Replace the fund when its AMI ranking drops out of the top five, such that you always hold the top 5 ranked funds.

For people who like the strategy in my model portfolios and want to follow them, here are a few ways to start with:

1. Jump right in 100% (higher risk),
2. Patiently wait for the next position change (may take a long time), or
3. Invest the same amount of money every week to the fund I hold until the next position change (kind of dollar averaging).

Once a strategy is developed, the key to success is to apply it objectively, consistently and not to stray from it. From my experience selling decisions are much more difficult to make than buying decisions. Thus it is important to make the strategies as simple as possible so that the trading signals when triggered, are unequivocally clear