EdgeWare FastBreak Standard Version 5 - Manual (Page 72)

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FastBreak does a check to determine if the same fund would be repurchased. If this is the
case, FastBreak does not take the trade. This makes the software run a little slower, but
we feel it is a better representation of how a user would actually trade the system. It also
has the added benefit of not charging any redemption fees on the false trades.
In previous versions, when using a signal file and the signal was on a sell, FastBreak
would check to determine if the money market fund was hitting any stops. This was
done in case the user was holding something other than a normal money market fund, i.e.,
a short fund such as Rydex Ursa. However, we found that this logic can cause problems
when using the Rate of Return Sell Filter (it was not a problem for other stops because a
typical money market is not affected). The filter would cause the money market fund to
be sold and repurchased when the signal file was on a sell. We have made a change in
the logic -- if a signal file puts you in the money market, the stops are all ignored, and the
system will stay in the money market until a signal file buy is given.
Building Market Timing Signals
If you have an overall strategy with an MDD of say, 15%, then don’t make the market
signal too efficient. For example, when building the market timing signal use a goal of
perhaps 20-25% for the signal MDD. Then, when you use the resulting signal to build the
actual trading system, use the 15% MDD goal. The reason for this is that if the signal is
too efficient; no stops will be necessary in the actual trading strategy. It is usually a good
idea to have at least one stop activated because it is unlikely the signal will be perfect in
the future.
We have found it is very difficult to control the MDD of stock trading systems without
market timing signals. Even in a severe bear market there will be individual stocks that
rally strongly and result in whipsaw purchases. This is because a strong rally isn’t sus-
tainable in a bear market. Just as “a strong bull market lifts all boats,” a strong bear mar-
ket drags down good stocks. The market timing signal only needs to keep you out of the
worst markets. The signal may only average one or two switches per year. You can of
course control the switches per year with the optimizer.
We like signals that use a range of indexes in the trading family. In general, most in-
dexes move together, but there are times when some market segments will diverge. For
example, small caps may be in an uptrend when the large caps are selling off or are flat.
Have the market timing signal keep you in the market, and let the FastBreak strategy
built on this signal rotate you into the right funds or stocks. We have built successful
signals that combined SP-CP, NDX-X and RUT-I in the signal family.
If you want to trade specific market sectors, such as energy stocks, you should build an
energy sector timing signal. We have built such a signal using Fidelity Select Energy
Services fund (FSESX) alone in a family to build a signal. We also experimented with
Fidelity Select Energy (FSENX) alone and combined with FSESX for the signal. We
used these different signals with a batch of energy and energy service stocks with very
good results.