EdgeWare FastBreak Standard Version 5 - Manual (Page 10)

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4.0 FastBreak Trading System
FastBreak uses a trading system method that buys mutual funds showing strong relative
trends in price and sells funds that are showing poor relative trends in price. You may
hear traders refer to this type of trading system using many names: market sector upgrad-
ing, momentum investing, trend following, fund ranking, and relative strength trading.
We will take a quick look at each of these concepts, because there are small differences,
and explain how FastBreak works.
Market Sector Upgrading (MSU) The simple explanation of MSU is moving your in-
vestment out of a sector of the market that is showing poor relative strength and into a
sector of the market that is showing the best or better relative strength. For purposes of
this discussion, the word “sector” refers to industry groups that make up the market, for
example, health care, transportation, technology, etc. An example of MSU would be a
move from the energy sector into the health care sector if health care funds are showing
better price strength relative to energy funds.
MSU tends to be a fully invested trading strategy that relies on being in the strongest sec-
tor of the market for good performance rather than using market timing. However, in
bear markets, money market funds can be a considered a strong sector for investing.
Many investors using MSU use the Fidelity Investments Select Funds, but there are other
mutual funds offered that concentrate on a narrow sector of the market, for example, Ry-
dex and ProFunds have a large number of sector funds.
Why do different sectors of the market rotate in and out of favor? There is probably no
single answer to this question. Some of the rotation may be due to the economic cycle
(The All Season Investor by Martin J. Pring is an excellent book on this subject) or presi-
dential election cycle. Political climate can be another influence. Health care funds were
impacted in 1993 with the debate on a national health care plan but bounced back with
excellent gains in 1994 and 1995 when that plan was abandoned.
Momentum Investing Momentum investing (not to be confused with earnings momen-
tum) buys funds showing a surge in price with the thought that the price will continue to
move upward. This system is not limited to any particular type of fund.
Trend Following Trend following systems rely on longer term, major up trends in price.
Trend following systems usually don’t get in at the start of a major up trend or get out at
the top of an up trend. The system usually waits until an up trend is firmly established
before purchasing a fund and often waits until the trend is clearly ended before selling.
The system is not limited to any particular type of fund.
Relative Strength Trading and Ranking Strategies Trading systems based on relative
strength or ranking are very similar. Relative strength usually compares the price action
of a fund to an index and buys the fund that is showing the strongest strength compared