Trend Following System

This Trend Following System is derived from the work of Constance Brown. In her book Technical Analysis for the Trading Professional she discusses RSI trading zones for both bull and bear markets. RSI (Relative Strength Index) is a very popular indicator developed by Welles Wilder. It measures gains vs. losses over a defined period and is traditionally used to signal overbought and oversold markets. The formula can be found on several sites on the web so I won’t go into detail here. What Constance points out in her book is that in a bear market the RSI will not typically trade above 60 and in a bull market the RSI will usually stay above 40.

What I have done with this is applied a 14 period RSI to a weekly chart of the SPY. SPY is ETF of the S&P 500. A long signal is generated when the RSI closes above 60 for the week. We will remain long until the RSI closes below 40 for the week. Signals are generated on Friday and trades were taken at the open on Monday. I realize that in most 401k accounts trades are done on the close. This should not significantly change the results.

Caution: This is a rather large file and may be slow in loading.

SPY CHART W/ RSI Trend Following System

 Trend Following System Trade Dates 

Past performance is not necessarily an indication of future performance. Hypothetical or simulated performance results have certain inherent limitations. See full disclosure on disclosure page.

Market Timing Strategies

As stated in a previous post I will be adding various market timing strategies to this site. I do not think one market timing strategy or one type of system will work in all markets, all the time. For this reason I plan to add market timing systems and strategies in the following categories:

Trend Following System– These Systems will embrace the existing trend of the market and not attempt to predict it.

Interest Rate Model – Is the current interest rate environment favorable to business?

Market Breadth – How broad based is the current move? Are only a few issues leading the market?

Market Sentiment – This is a measure of market or crowd psychology. When these measures reach extremes the market is likely to turn.

Seasonality – Some times of year are better than others to be in the market.

Market Fundamentals – Reference to these numbers will let you know if the market is priced high or low relative to history.

It is my hope that by using multiple systems from these categories we will avoid the risk of betting on one system that may breakdown at certain times.