Thursday, October 29, 2009

Rydex Asset Allocation Trading System

I have 3 trading systems that I have used for the past 2 years that are very solid but also very short term.

With fixed income returns down to 1-3% I need something that will give me a 'modest' risk return of 8% a year.

While searching for a longer term system I found http://www.tradingmutualfunds.com/site/791078/page/891334

They move money around using a very simple method of active asset allocation and use Rydex family of funds to keep costs to a minimum.

Searching for rules to trade such a switching system I found an old AIQ Opening Bell Newsletter from October 2002 in an interview of Jay Kaeppel who described a relative strength mutual fund trading system.

"The Relative Strength System buys and holds the five Fidelity Select funds at the top of the Relative Strength Long-Term Report (with the caveat that the low for the most recent week must be above the 28-week EMA). A fund is held until it registers a weekly low that is below the 28-week EMA at the end of the previous week. Then it is sold and replaced with a new fund from the Relative Strength Report."

This approach moves too slowly for me although I agreed with the general approach and goals.

In the August 2001 issue of Active Trader magazine there was an excellent article on "Dynamic Asset Allocation" by Michael De La Maza where he shows how to combine short-term risk management with a long-term trading horizon. This article uses the Sharpe ratio to allocate capital among a set of mutual funds and the re-balancing is done daily (what I want).