Part V of the Dynamic Momentum Trading System (DMS) is presented below. It is an ETF Rotational Trading strategy that uses momentum to rank and then rotate among ETFs.

This post will do the following:

1. Show the simplicity of trading weekly rankings and how they are used.
2. Review the process of Dynamic Momentum Trading.
3. Integrate the Simple Switching System (SSS) into Dynamic Momentum Trading.

For those who have not read the prior posts, they are integral to understanding what will be discussed below. You may click here for these posts: Part I, Part II, Part III and Part IV.

The Dynamic Momentum Trading System Cycle

The DMS ranks ETFs utilizing weekly data. The highest-ranked ETFs are expected to outperform lower-ranked ETFs. The DMS system trades once per month and provides the option to trade 1, 2 or 3 ETFs. It offers three trading styles: Normal, Aggressive, and Conservative. For DMS, the best backtest results were achieved by trading one ETF using the Normal or Aggressive trading styles. These outcomes can be found in earlier parts of this series.

Rankings are published each weekend based on data through the most recent week. Only the last Friday of each month is considered as a trade day. The highest ranked ETFs on these trade days are entered on Monday at the open of markets. Existing trades are also exited then. Actual trades for the last two years are shown in Table 1 below.

Rankings are published weekly and could be acted upon then. For backtesting purposes, trades only occur after the last Friday of each month.

Incorporating SSS into the Trading Cycle

SSS is a GO — STOP indicator that can be used to override DMS. It is optional. Its purpose is as a permissioning switch. When performance is deteriorating it is reflected in this indicator. It need not be used, but it does serve as a guide and protection against major downturns in trading performance. It reduces risk and also returns.

Two measures of SSS were discussed and backtested. See Part IV for more details.

Table 1, to the right, contains the last two years of DMS Normal trading for one position. Only trade days are shown. (Dark green signifies a trade day and an ETF trade.) The right column is the permissioning column. It is not used in the standard DMS trading system.

The SSS generates the permission signals. The permissioning column is used if one wants to screen DMS trades. The color lime green in the permission column is a positive, i.e., go with the trade. Pink is a caution or a signal to avoid the trade. If the trade is not taken, the system goes to cash.

The SSS permission is for the DMS system itself, not just the individual ETF that is ranked.

Two Types of SSS

Table 2

Two SSS systems were explained in Part IV. One was labeled Strict and referred to as SSS1. The other was labeled Easy and named SSS2. The difference between the two pertains to re-entry.

SSS1  allows re-entry only on trade days (end of month rankings as shown in Table 1). Table 1 is all that is required to trade SSS1.

SSS2 allows re-entries between trade days. To illustrate, Table 2 (left) shows all Fridays, not only trade day Fridays. The non-trade day Fridays are shown in yellow in the table to the left.

If one were trading SSS permissioning, XLF would not be entered on its trade day by either SSS1 or SSS2. Cash would be held. No entry would be made under SSS1 until the next trade day. Under SSS2, re-entry would be made based on the permission (table on left) that occurred on the non-trade day of 12/2/2016.

Users can use these systems however they choose. The rules used for SSS1 and SSS2 were established for backtesting purposes in Part IV.

Macro Look

Both SSS1 and SSS2 lower risk and returns. The two graphs below are hard to read but provide an indication of the effects of both. In both graphs, the top three equity curves show one position results for Normal, Aggressive and Conservative trading styles (ending equity values are high to low in the same order). The bottom three lines (dotted) represent the SSS1 equity curves for each trading style.

TRADES 1: SSS1

Click here for Larger Version

The next chart shows the same information for the DMS trading styles but compares them with SSS2 results.

TRADES 1: SSS2

The ending equity between trading DMS and trading SSS is profound for these trade options. The best of the two SSS curves are the normal trading styles with SSS2 reporting $54.6K and SSS1 $51.1K. Normal DMS amounted to $125.4K. (It should be noted that a buy and hold strategy of the S&P 500 produced less than 16K over this same period.)

SSS outcomes improve relative to DMS outcomes as the number of positions and styles change. That can be seen in Part IV.

Conclusion

A rather comprehensive set of posts has been presented to describe a complex momentum rotational ETF trading strategy. Numerous options have been explored via backtesting. At this point, you might be wondering what this means to you. Or, how might you use these tools?

Unfortunately, there is no single right answer. There probably are as many answers as those asking the question(s). Each individual is different. He/she has different risk tolerance and needs. Individuals with existing portfolios should likely do things differently than those with limited portfolios. Age may be an important consideration in this kind of decisions. So too may be the employment/retirement conditions.

Anyone making any major financial decision should consult the advice of qualified financial experts. This series of articles is not a recommendation to engage in momentum trading. Nor should it be implied that backtest results are likely to be repeated in the future. Whether you should consider using some of this information for trading is a decision you should not make alone unless you are financially sophisticated.

Good luck and good trading.