Comments on: Sector Rotation: Book Recommendations http://blog.afraidtotrade.com/sector-rotation-book-recommendations/ Helping traders overcome fears and emotions in trading Thu, 09 Feb 2012 12:53:25 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Corey http://blog.afraidtotrade.com/sector-rotation-book-recommendations/comment-page-1/#comment-1314 Corey Sat, 05 May 2007 17:59:21 +0000 http://blog.afraidtotrade.com/sector-rotation-book-recommendations/#comment-1314 Hi Joe - thanks for the comment. For discretionary trading, your goal is to put a preponderance of evidence in your favor for increased probabilities of success. If you are following a mechanical trading system using moving averages, then no further research is necessary and the results of your trading system will be based on your inputs and settings and position sizing/management. However, attempting to 'tweak' the system can produce better results, especially if you use filters and cycle/sector information. In other words, technical analysis (moving averages) does not work in isolation. There are underlying reasons why certain sectors and certain stocks trend, and it has to do with fundamental information that drives large funds to buy into stocks/sectors over an extended period time based on valuation and future value. That being said, yes, I do believe sector study and stock selection based on sectors that are outperforming can lead to better than chance results than if you simply analyzed moving averages and took isolated signals. One note of caution - though sector rotation has shown an edge, realize that sectors that have trended for a long period of time will eventually 'roll over' as another sector comes into favor, so it might be best to identify not only the top performing sector, but those that are showing recent strength that is increasing (rather than strength over many months that has been sustained) if you are looking for larger gains. Also realize that the goal is NOT to improve your winning percentages, BUT rather your risk/reward ratio. In trend-following, you may take 5 positions that are stopped out for a loss in a row (in trying to find the beginning of a new trend) but that 6th trade might result in an abnormally high reward to risk ratio (assume you lost $1,000 in the first 5 trades for a total of $5,000, but the 6th trade resulted in a $35,000 profit, leaving your net profit $30,000 over 6 trades and a win percentage of 17%). Hi Joe – thanks for the comment.

For discretionary trading, your goal is to put a preponderance of evidence in your favor for increased probabilities of success. If you are following a mechanical trading system using moving averages, then no further research is necessary and the results of your trading system will be based on your inputs and settings and position sizing/management.

However, attempting to ‘tweak’ the system can produce better results, especially if you use filters and cycle/sector information.

In other words, technical analysis (moving averages) does not work in isolation. There are underlying reasons why certain sectors and certain stocks trend, and it has to do with fundamental information that drives large funds to buy into stocks/sectors over an extended period time based on valuation and future value.

That being said, yes, I do believe sector study and stock selection based on sectors that are outperforming can lead to better than chance results than if you simply analyzed moving averages and took isolated signals.

One note of caution – though sector rotation has shown an edge, realize that sectors that have trended for a long period of time will eventually ‘roll over’ as another sector comes into favor, so it might be best to identify not only the top performing sector, but those that are showing recent strength that is increasing (rather than strength over many months that has been sustained) if you are looking for larger gains.

Also realize that the goal is NOT to improve your winning percentages, BUT rather your risk/reward ratio. In trend-following, you may take 5 positions that are stopped out for a loss in a row (in trying to find the beginning of a new trend) but that 6th trade might result in an abnormally high reward to risk ratio (assume you lost $1,000 in the first 5 trades for a total of $5,000, but the 6th trade resulted in a $35,000 profit, leaving your net profit $30,000 over 6 trades and a win percentage of 17%).

]]> By: Joe http://blog.afraidtotrade.com/sector-rotation-book-recommendations/comment-page-1/#comment-1313 Joe Sat, 05 May 2007 17:43:21 +0000 http://blog.afraidtotrade.com/sector-rotation-book-recommendations/#comment-1313 Corey, Currently, I use moving averages and some more easy trend following indicators scan for stocks and enter a trade. If I include the sector rotation into my scanning and limit additionally by stocks that are part of a sector in a strong up or down trend, would that significantly improve my winning percentages? Is it this way you include sector rotation into your strategy? Thanks, Joe Corey,

Currently, I use moving averages and some more easy trend following indicators scan for stocks and enter a trade. If I include the sector rotation into my scanning and limit additionally by stocks that are part of a sector in a strong up or down trend, would that significantly improve my winning percentages? Is it this way you include sector rotation into your strategy?

Thanks, Joe

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