Protecting Your Automated Investment Strategy

Should you protect your automated investment strategy by having a money market fund as a component of your watch group, your universe of ticker symbols?

Investment strategies can give you buy-sell signals based on your method of analysis and chosen buy-sell rules. But one common question is whether or not having a money market fund in the group would protect you when the market declines.

The investment program I use does not include money market funds in the database because money market funds don’t really trade. Their price stays at $1 all the time so if they ever jump in rank to the top of a strategy they would stay there forever. The same applies if you use a spread sheet like analysis setup and do a column sort that puts the money market fund at the top. One alternative is to use an ETF that mimics a money market or an ETF for a stable bond group. I have used both IEF and MINT. It seems that MINT is the most stable, but again the risk remains that it would get stuck at the top unless you use an Alpha formula that takes into account tickers symbols that rarely move or issue regular.

So how do you protect your investments, your investment strategies?

The Market Exit Signal (ME) in some investment programs is specifically designed to tell you when to exit the markets. I use it in almost all of my strategies. My back testing indicates that if someone used an ME investing tool with the benchmark option they would have experienced minimal losses during our recent recession and moved back into the markets almost immediately when the markets began their climb back up. I my tell my program to default to IEF when the ME signals so I am instructed to buy IEF – and I view this signal as a choice to either purchase this ticker or move to a money market fund until the ME gives me a buy signal of a regular ticker symbol in my group.

The ME, to further explain, is based on the equity curve of the benchmark symbol of your group of tickers. When the price line cuts down through the equity curve a ‘get out of the market’ signal is generated. Personally I set this signal at about 100 trading days or 20 weeks. Shorter settings have not proven to be that much more effective while they produce greater trade volatility. Longer settings create greater exposure to market declines and potential losses; according to my tests. Mike Carr discusses the equity curve in more detail in his book, Safe Profitable Investing with Relative Strength.

In essence the best way to protect your automated investment analysis buy-sell recommendations is to choose:

  • A Market Exit Signal
  • Check the Equity Curve of your positions
  • Check the Equity Curve of the market (S&P 500)

The use of one of these signals or even all three should help you reduce losses to the bare bone minimums.

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