Rotational Trading (RT) is a medium term technique that takes advantage of a well-documented market anomaly whereby rapid long term price increases are often followed by a continued move in the same direction.
Here’s what a typical rotational trade looks like.
Of course mean reversion trading is not just as simple as buying any share that falls! If you do that, you will of course lose money! You will need to use filters that narrow the tradeable universe of shares down to those that are most likely to exhibit this momentum behaviour, and combine this with sensible risk management and exit criteria.
Of course rotational trading is not just as simple as buying any share that trends upwards! If you do that, you will of course lose money!
You need to utilise filters that narrow the tradeable universe of shares down to those that are most likely to exhibit this momentum behaviour, and combine this with sensible risk management and exit criteria.
This strategy offers a systematic way of constructing and regularly rebalancing a portfolio with a view of outperforming the market on a 12 month rolling basis.
It is a strategy that aims for Relative Performance. For example, if the market falls 20% in a year the model will likely produce a negative result, but with the aim of losing less than the market.
This was once the exclusive domain of Hedge Funds but we have developed this system to be viable for Retail and Sophisticated Investors. This strategy is suitable for patient investors who wish to maintain an active investment strategy.
The strategy works under the assumption that returns of ASX equities persist. This is to say that high past returns are more likely than not to be followed by high returns in the future, in other words, it is a Momentum strategy.
The performances of Momentum strategies do, in some sense, challenge aspects of the Efficient Market Hypothesis.
Understanding as to why this strategy produces superior results is not uniformed. An academic theory relates to the inefficient diffusion of information on the ASX. By targeting stocks that have displayed persistent positive growth, investors can benefit from the buying pressure created, after they entered, by other investors buying “too late”; the later investors did not efficiently act on new information.
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