SECTOR TIMING

The Necessity of Optimization Technique and the Steps to do the Difference


The most basic pitfall of systems developers today is the establishment of a set of rules specifically tailored to that particular segment of time. Hence most beginning system developers take the entire database and look to see that the bottom line result is maximized at the end of the period.

This may sound contradictory but Optimization is the biggest danger to the development of any strategy however a necessary part of the development of any system. You want to use the smallest subset that allows for testing that includes all outside aberrations, such as recessions or wars or market cycles to test the efficacy of the hypothesis. The testing of a mechanical system must see its results evaluated over some finite period of time which makes up the data set.

The optimization of rules on the smallest subset and then tested exhaustively against multiple segments of data from different periods in time outside of the database upon which the system was developed is the requirement of the sound system development.

One of the "Less is more" situations in life is the system development. Being a person that thinks about the progress of his field of concern, he will examine every detail of information that would justify his existence.

Thus, do different by:

• Allowing trades to run as long as they continue to show profit potential.

• Holding the funds for the minimum holding period where possible, but cut trades short mercilessly despite penalties when called for.

• Selecting sectors that have exhibited the best near-term price to performance ratio.

• Having simple rules that take into account price dynamics not only recent price volatility, but evaluation of the ability of lower priced funds to make a greater percentage of profit easier.

• Moving into the right kind of Money Market fund so as to gain interest during non-investment periods at the highest possible rate when sector timing exit is indicated.