AIQ TradingStrategiesUser GuideThe Style Index RotationStrategyThe MAPS SystemThe Best of TimesWorst of TimesTrading StrategyThe Efficient StocksStrategy
CONTENTSIntroduction. 3Style Index Rotation StrategyWhat is the Style Index Rotation Strategy?. 4Why trade Exchange Traded Funds?. 4What does the strategy do?. 4How do I get started using the Style Index Rotation Strategy?. 5What do I do if there is none or one ETF in the report?. 6Reviewing candidates in AIQ Charts. 7Style Index Trading Vehicles. 7About David Vomund. 7How effective is the strategy?. 8MAPS StrategyWhat is the MAPS Strategy?. 9What is the MAPS designed to trade?. 9What does the strategy do?. 9Example of the Long Version of MAPS.10How do I get started using the MAPS Strategy?. 11Reviewing candidates in AIQ Charts. 13How do I run this strategy automatically every night?. 14About Steve Palmquist. 14How effective is the strategy?.14The Best of Times, Worst of Times StrategyWhat is the Best of Times, Worst of Times Strategy?.15What is the Best of Times, Worst of Times Strategy designed to trade?.15What does the strategy do?.15How can I buy 10 industry groups at one time?. 16How do I get started using the Best of Times, Worst of Times Strategy?. 16Viewing the stocks in each candidate group. 18About Jay Kaeppel. 20How effective is the strategy?.20The Efficient Stocks StrategyWhat is the Efficient Stocks Strategy?.21What is the Efficient Stocks designed to trade?.21What does the strategy do?.21How do I get started using the Efficient Stocks Strategy?. 21Reviewing candidates in AIQ Charts. 23How do I run this strategy automatically every night?. 24About Dr. Van K. Tharp.24Additional Strategies in your AIQ tradingExpert Pro.25
IntroductionIf you have not already done so install the AIQ TradingExpert Pro Software andStrategies CD included with your package. To do the install follow the instructions inthe New User Guide Installation & Tutorials.This guide in intended to introduce you to the trading strategies sent withTradingExpert Pro. There are many strategies available to suit all types of tradingstyles. To introduce you to the many strategies available, AIQ has focused on fourstrategies that are used by traders and professional money managers. Thesestrategies are clearly outlined in this guide including what the strategy trades, howto get started easily and quickly using this strategy and, where available, results onhow effective the strategy is.The four strategies come with a wealth of supporting material and articles that areinstalled with the software and placed in a folder called Trading Strategies. Thisfolder can be found by going to Start, Programs, TradingExpert Pro, TradingStrategies. Each of the four featured strategies can be accessed by clicking theappropriate icon.We suggest you read through this guide and try out these strategies using thehistorical data provided.In addition to these four strategies, AIQ has many other strategies included with theTradingExpert Pro software. Most are accessible through our trading system design tool, Expert Design Studio (EDS). To see some of these strategies, clickStart, Programs, TradingExpert Pro, Expert Design Studio. From the menu ofEDS, click on File, Open, Look in, browse to the folder /wintes32/EDS Strategies. You will see a series of folders that you can open and view the strategieslisted. Clicking on a strategy opens it in EDS where a clear explanation of thestrategy will appear. An explanation and example of many of these strategies isavailable at http://www.aiqsystems.com/EDSStrategies.htm3
Style Index Rotation StrategyWhat is the Style Index Rotation Strategy?Instead of being locked into one trading style, it is best to employ a strategythat has the flexibility to rotate to the best performing market segment. That’s whatour Style Index strategy is all about.The Style Index strategy trades securities that track various market indexes.These “style” indexes include large-cap growth, large-cap value, small-cap growth,small-cap value, and so forth. While mutual fund families like the ProFunds havefunds that track these indexes, the best vehicle for trading style indexes is exchangetraded funds (ETFs), the fastest growing financial product in the United States.Style Index Rotation StrategyWhy trade Exchange Traded Funds?4First launched in the early 1990’s, ETFs are securities that combineelements of index funds, but do so with a twist. Like index funds, ETFs are poolsof securities that track specific market indexes at a very low cost. Like stocks,ETFs are traded on major U.S. exchanges and can be bought and sold anytimeduring normal trading hours.Trading style indexes allows investors to gain well-diversified exposure to aspecific area of the market. Since an ETF holds a basket of stocks, one badperformer should have only a minimal effect on the price of the ETF.Those who want to employ this strategy may be concerned with liquidity inthe ETFs. With ETFs, volume does not define their liquidity. Unlike a stock or aclosed-end mutual fund, the number of shares in the market is not fixed. If thedemand for a given ETF outstrips supply at any point, an ETF specialist can createnew ones from a basket of the underlying securities in that fund. When a largetransaction is placed, shares can be created or redeemed to meet demand.Studies show a high, but not exact, correlation between the benchmark indexesand the ETFs. Limit order should be placed on low volume ETFs as bid-to-askspreads can be wide.What does the strategy do?The strategy utilizes a straight forward mechanical buy/sell methodology.1) The AIQ Relative Strength-Short Term report is run on the ETFs in yourdatabase.2) Buy the first two ETFs in the report with an equal amount of capital.3) Two weeks later run the report again.4) If the current holdings were rated as one of the three best in the report, thenthere were no trades. If a holding has fallen in the Relative Strength report towhere it was no longer in the top three, then it should be sold and the highestrated ETF was purchased.
How do I get started using the Style Index Rotation Strategy?Click on Start, Programs, TradingExpert Pro, Trading Strategies, Style Index.The AIQ Reports will launch. The reports are already configured to run on the ETFsinstalled in your TradingExpert Pro database.Figure 1 shows the AIQ Relative Strength Report - Strong Short TermThe top two ETFs in the report would then be purchased with an equal amount ofcapital. In this case IJT and MDY. The report would then be run every two weeks andpositions adjusted accordingly. If the current holdings were rated as one of the threebest in the report, then there were no trades. If a holding had fallen in the RelativeStrength report to where it was no longer in the top three, it should be sold and thehighest rated ETF was purchased.Style Index Rotation StrategyTo generate the AIQ Relative Strength-Short Term reports for ETFs:- Click on AIQ Reports, Stock Reports, Relative Strength – Strong, ShortTerm.- From the reports menu, click on Generate, Selected Reports. To familiarizeyourself with the report, select an historical date to generate. AIQ has installed plentyof historical data for the ETFs. Figure 1 shows a generated report for 02/25/05.5
What do I do if there is one or no ETFs in the report?Style Index Rotation StrategyAs the funds rotate there may be occasions when the Relative Strength Strong Short Term Report has only one or no candidates. In this instance, you will need tolook at the Relative Strength Weak - Short Term Report. The bottom two ETFs in theWeak report combined with the top ETFs from the Strong report are combined todetermine if you need to adjust your position. In the example Figure 2 below thethree ETFs would be MDY, IJT and SPY.6Figure 2: Relative Strength Strong - Short Term and Relative Strength Weak - Short TermReportsNOTE: The reports used in this strategy are generated every night automaticallyafter you update your AIQ database.
Reviewing candidates in AIQ ChartsTo review the candidates in AIQ Charts, double click on the ETF symbol within thereport and the chart will launch. Alternatively you can build a list of all the ETFs in thereport and review them in AIQ Charts by clicking the Build Report List icon.TickerIVEQQQQSPYMDYIJSIJTIWMETFiShares Large-Cap ValueNasdaq 100 TrackingS&P 500 SPDRMidCap SPDRiShares Small-Cap ValueiShares Small-Cap GrowthiShares Small-Cap IndexBenchmark IndexS&P 500 /Barra ValueNasdaq 100S&P 500S&P 400 MidCapS&P 600 SmallCap/BARRA ValueS&P 600 SmallCap/BARRA GrowthRussell 2000As with any investment strategy, past performance does not guarantee futureresults.About David VomundDavid Vomund is editor of AIQ’s Opening Bell newsletter,and publisher of VISalert.com. Through his investmentadvisory firm, Vomund employs The Style Index Strategyon client portfolios (www.ETFportfolios.net). He waspublished in Active Trader, Technical Analysis ofStocks & Commodities, and was a contributing author ofComputerized Trading - Maximizing Day Trading andOvernight Profits.Style Index Rotation StrategyStyle Index Trading Vehicles7
How effective is the strategy?Since price history on ETFs is limited, it is not possible to run a backtest anddevelop a model that covers both bull and bear markets. Most ETFs began tradingin 2000. Therefore, a backtest of a trading system cannot be run using ETF tradesbut must instead be run on the benchmark indexes that the ETFs track.Here is an example. Before the Nasdaq 100 ETF (QQQ) was traded, this backtestpurchased the Nasdaq 100 index. Before the Dow Diamond was traded, thebacktest bought the Dow Jones Industrial Average. Before the iShares Small-CapRussell 2000 was traded, the backtest bought the Russell 2000 index.Style Index Rotation StrategyThe strategy is designed to rotate to the segments of the market that have the bestperformance. During the bullish years, returns were led by the strength of theNasdaq 100 (QQQ) holding. During the bearish years, the portfolio outperformedbecause it exited the QQQ and rotated to a position in Small-Cap Value (IJS).Small-cap stocks actually rose in value during 2001.8Over the 6 1/2 year time period, the Style Index portfolio strategy rose 146% whilethe S&P 500 and Nasdaq Composite rose about 30%. The year-by-year resultsare found in Table 1. The strategy outperformed the S&P 500 index every calendaryear and it held its value during the 2000 through 2001 bear market years. It wasn’tuntil the third quarter of 2002 that all style indexes fell in value, accounting for the2002 loss. An investor should not expect the strategy to rise in value during a fallingmarket. Keep in mind that this is a backtest so it does not represent actual returns.The purpose of the backtest was to create and gain confidence in a strategy thatcan be used to trade ETFs which track style indexes.Table 1. Yearly Results (%)Year1998199920002001200220032004Style &P 500Index28.5821.04-9.10-11.89-22.1028.699.4As with any investment strategy, past performance does not guarantee future results. To view a full transcript of this back test double click the David Vomund’sStyle Index test icon in the Trading Strategies folder (requires Adobe AcrobatReader available at tml).
Moving Average Pullback StrategyWhat is the MAPS Strategy?Pullback systems have been popular for a long time and are based on theobservation that trends tend to continue, and pullbacks in the trend offer a definedrisk entry. Pullback systems based on up trends generally work best in a bullishmarket environment, and should usually be avoided in a bearish market. Pullbacksystems based on down trending stocks generally work best in bearish marketsand should be avoided in bullish markets.What is MAPS designed to trade?The strategy was designed to trade stocks both short and long over a short termholding period.What does the strategy do?Long Version of MAPSMAPS Setup Conditions:1) The stock must be in an uptrend.2) The stock must not have fallen below the 30 day simple movingaverage in any of the past 30 trading sessions.3) The stock has pulled back to within 1.5% of the 30 day simple movingaverage.4) The average daily volume of the stock must be at least 300,000 shares.MAPS Trigger Conditions:1) If the setup conditions were met after the close today, then look for thetrigger conditions tomorrow.2) The high on the day after the setup conditions are met must be above theprevious day’s high.3) The volume on the trigger day must be above the average volume.When a valid MAPS setup occurred yesterday, and a valid trigger occurs today,then the MAPS system buys at the opening tomorrow and holds for three days thencloses the position. Traders should always use a protective stop to protect fromlarge losses.The MAPS SystemThe MAPS technique requires specific setup conditions to be met on the first dayand specific trigger conditions the following day. Running the EDS scan in theevening finds stocks meeting the setup conditions. During the next trading sessionthe trader can watch for the price and volume conditions of the trigger to be met.This is usually done by setting price triggers in AIQ or myTrack software.9
Example of the Long Version of MAPSSee the example of a MAPS stock in Figure 1 below. You can find EXBD by runningthe basic MAPS scan on June 23, 2004. EXBD had been above the 30-dayaverage (shown in red) for at least 30 days and then pulled back to within 1.5%of the 30-day average on June 23. The following day, EXBD triggered by movingabove the previous day’s high of 54.88. Five days later, it hit a high of more than 58.The MAPS SystemFigure 1 shows an initial scan on 6/23/04. The stock price of EXBD pulled back to the30-day moving average, after which it moved up more than 3.10Short Version of MAPS (SMAPS)The short version of the MAPS technique requires specific setup conditions to bemet on day one, and specific trigger conditions to be met the following day. Runningthe EDS scan MAPullbackShort in the evening finds stocks meeting the setupconditions. During the next trading session the trader can watch for the price andvolume conditions of the trigger to be met. This is usually done by setting pricetriggers in AIQ or Mytrack software.SMAPS Setup Conditions:1) The stock must be in a down-trend.2) The stock must not have risen above the 30 day simple moving averagein any of the past 30 trading sessions.3) The stock has pulled up to within 1.5% of the 30 day simple movingaverage.4) The average daily volume of the stock must be at least 300,000 shares.
SMAPS Trigger Conditions:1) If the setup conditions were met after the close today, then look for thetrigger conditions tomorrow.2) The low on the day after the setup conditions are met must be below theprevious day’s low.3) The volume on the trigger day must be above the average volume.When a valid SMAPS setup occurred yesterday, and a valid trigger occurs today,then the SMAPS system buys at the opening tomorrow and holds for two days thencloses the position. Shorts often move faster than longs, so the holding time isshorter. Traders should consider protective stops to help guard against significantlosses. Shorting may carry significant risk and should only be considered byexperienced traders.How do I get started using the MAPS Strategy?Long Version of MAPSClick on Start, Programs, TradingExpert Pro, TradingExpert Strategies,MAPS.There are two elements to the MAPS strategy, the MAPS Setup Conditions and theMAPS Trigger Conditions.MAPS Setup ConditionsIn Figure 2, the tab Labeled MAPullback is where the stocks that meet the MAPSSetup Conditions will appear when this strategy is run.To familiarize yourself with the MAPS strategy, AIQ has installed plenty of historicaldata for stocks. To try this Setup Condition on an historical date:- Click on the Down Arrow, adjacent to the Report Date on the toolbar. Select anyhistorical data from the calendar.- From the menu, click Report, Run All. The system will scan all your stocks andreturn all those that meet the MAPS Setup Conditions in the MAPullback tab.The MAPS SystemThe AIQ Expert Design Studio will launch. You should see a screen similar to Figure2 on the next page. Click on the Rule Library tab to view all the coding required forthis strategy. The MAPS strategy is fully configured to run on the stocks installed inyour TradingExpert Pro database.11
Figure 2 shows the MAPS strategy displayed when launching the MAPS icon.The MAPS SystemMAPS Trigger Conditions:12In Figure 2, the tab Labeled MAPS1 is where the stocks that meet the Long MAPSTrigger Conditions will appear, when this strategy is run.NOTE: The stocks that display in the MAPS1 tab are the stocks that met the LongMAPS Setup Conditions yesterday and have now met the Long Trigger Conditionstoday. The stocks are then purchased, at the open, the next day.Short Version of MAPSThe Short Version of MAPS is contained in the same Expert Design Studio file asthe Long Version. The stocks that display in the tab SMAPS1, in Figure 2, are thestocks that met the Short MAPS Setup Conditions yesterday and have now met theShort Trigger Conditions today. The stocks are then sold short the next day.
Figure 3 shows Long MAPS strategy candidate CNET from June 2, 2005 displayedwith 30 day moving average.Reviewing candidates in AIQ ChartsThe MAPS SystemTo review the candidates in AIQ Charts, double click on the ticker symbol within anyof the MAPS tabs and the chart will launch. Alternatively you can build a list of all thestocks in the tab and review them in AIQ Charts by clicking the Chart List icon.13
How do I run this strategy automatically every night?Add this strategy to your AIQ Data Retrieval:- Click on Start, Programs, TradingExpert Pro, Data Retrieval.- Select the EDS Post Processing tab.- Select Add, and browse in the Look in: box for /wintes32/EDS Strategies/MAPS/MAPS Long and Short Code for AIQ.EDS.- Click Exit. The strategy will run every night after your download.About Steve PalmquistSteve Palmquist is a full-time trader and publisher ofdaisydogger.com. Steve uses AIQ's Expert DesignStudio to find interesting trading ideas and strategies.He has shared trading techniques and systems atseminars across the country; including the TradersExpo, and AIQ seminars. He has published articles inStocks & Commodities, Active Trader, TheOpening Bell, and Working Money.How effective is the strategy?The MAPS SystemDuring the bullish market period of 03/14/03 to 01/23/04, MAPS yielded interestingresults as shown in the table below. MAPS back-testing showed 62% winningtrades during this period with the average winner gaining 3% and the averagelosing trade losing 2%. More information on this strategy can be found in yourTradingExpert Strategies folder. As with any investment strategy, past performancedoes not guarantee future results.14Detailed back test information for the Long and Short version MAPS is available bydouble clicking the MAPS Scan test icon in your Trading Strategies folder (requires Adobe Acrobat Reader available at tml).
The Best of Times, Worst of TimesTrading StrategyWhat is the Best of Times, Worst of Times Strategy?The strategy is designed to take advantage of industry group rotation employingboth strong and weak group analysis. The Best of Times involves buying stocksfrom groups that are already moving up. The Worst of Times involves buying stocksfrom groups that have declined over a longer period of time, and are then set toreemerge as leading performers.What is the Best of Times, Worst of Times Strategy designedto trade?The strategy was designed to trade stocks for a longer term holding period.What does the strategy do?There has been much debate about whether it is better to buy weak stocks orstrong stocks. The theory behind buying weak stocks is that you have theopportunity to “buy low and (hopefully) sell high.” The theory behind buying strongstocks is one of momentum – an object in motion is most likely to continue in thatmotion. This is also true with industry groups – however, not to the samedegree. While a given company may go out of business for any number ofreasons, it is a much more rare occurrence for an entire industry group todecline in price and never rebound.Generally speaking, there is a pattern which is not uncommon for industry groupprice performance. At some point, the fundamentals for a given industry go southand eventually so do the stocks in that industry group. This can go on for any periodof time, but usually does not last much longer than about two years. Once themajority of the decline is over, the group may then experience a period of basingaction for up to a year (actually, the longer the better). Once this long decline andbasing period is over, it is not uncommon for a group to then reemerge as a leadingperformer.So which is better? Buying “weak” industry groups or “strong” industry groups?Jay Kaeppel’s research has led him to the Best of Times, Worst of Times thatutilizes both strategies rather than attempting to choose one or the other.Best of Times, Worst of Timesaol.com.15
The Best of Times, Worst of Times Strategy involves buying and holding 10 industrygroups at a time - 5 weak and 5 strong. The strategy is run after the close on thelast day of trading each quarter and the portfolio is readjusted at the close on thenext trading day (i.e., the first trading day of each quarter).The ideal way to trade these groups is through the use of “folios”. Folios, alsoknown as stock baskets, offer many benefits to traders, particularly those who wantto tailor a portfolio to benchmark a certain industry or sector. Buying a stock basketallows a trader to invest the same amount of money in each of a number of differentstocks by purchasing fractional shares of each. Using a regular broker, positionsizing can be achieved by allocating equal cash amounts for each position andcalculating the number of shares.To buy “weak” groups, look for the worst performing groups over a 500-day period,then wait 12 months before buying those groups. To buy “strong” groups, look forthe best performing groups over the latest 240-day period and then buy thosegroups.”How can I buy 10 industry groups at one time?Best of Times, Worst of TimesAIQ has configured the reports to use a unique group/sector structure called listjk.All the groups in this structure contain 5 or less stocks. Each group is highlycorrelated to the stocks contained within it. The structure was modified by JayKaeppel from AIQ’s highly correlated Group/Sector Pyramid structure.16How do I get started using The Best of Times, Worst of Times?Click on Start, Programs, TradingExpert Pro, Trading Strategies, Best ofTimes, Worst of Times.The AIQ Reports will launch. The reports are already configured to run on the datainstalled in your TradingExpert Pro database and on the group/sector structurelistjk. The reports used in this strategy are already configured with the correctparameters and are as follows:Group Reports Price Change - Upside Long TermGroup Reports Price Change - Downside Long Term
Rules for Buying Strong Industry GroupsWe are looking for the groups that are performing the best right now. To buy “strong”groups, look for the best performing groups over the latest 240-dayperiod and then buy those groups. The mechanics for buying strong industry groupsare as follows:After the last trading day of each quarter:- Click on AIQ Reports, Group Reports, Price Change – Upside, Long Term.- From the reports menu, click on Generate, Selected Reports and set the dateto the last trading day of the quarter just ended (i.e., on 12/31/03 set the date to 12/31/03).Buy the stocks in the top five groups, giving equal weight to each group, and thenrepeat this process at the end of the next quarter.Figure 1 shows Group Reports, Price Change – Upside, Long Term generated on03/31/03. The top 5 groups are the candidates.Best of Times, Worst of TimesNOTE: The Group/Sector structure used as a default in this strategy may containless than 5 stocks in certain groups. The priority is to make sure that each group isgiven an equal weighting of cash when purchasing stocks.17
Viewing the stocks in each candidate groupBest of Times, Worst of TimesDouble click on the first group in the report and the chart of the group will bedisplayed in the AIQ Charts application. Make sure the list selection pull-down boxshows listjk. Press the enter key and the control panel on the right will display thestocks within the group. These are the stock candidates to consider. Repeat thisprocess for each of the five top groups in the report.18Figure 2 shows how the group is displayed in AIQ Charts with the component stocksvisible in the Control Panel on the left.NOTE: Clicking and holding down your left hand mouse button, hilighting thestocks in the group and then releasing the button, displays all the stocks fromthe group at one time.Rules for Buying Weak Industry GroupsWe are looking for groups that have experienced prolonged declines and have alsohad some time to consolidate and build a base for an upswing in price.To buy “weak” groups, look for the worst performing groups over a 500-day period –then wait 12 months before buying those groups. The mechanics for buying weakindustry groups are as follows:After the last trading day of each quarter:- Click on AIQ Reports, Group Reports, Price Change – Downside, Long Term.- From the reports menu, click on Generate, Selected Reports and set the dateto the last trading day of the quarter ended one year ago (i.e., on 12/31/03 set thedate to 12/31/02).
Buy the stocks in the top five groups, giving equal weight to each group, and thenrepeat this process at the end of the next quarter.Figure 3 shows Group Reports, Price Change – Downside, Long Term generated on03/31/02. The top 5 groups are the candidates.Viewing the stocks in each candidate groupDouble click on the first group in the report and the chart of the group will bedisplayed in the AIQ Charts application. Make sure the list selection pull-down boxshows listjk. Press the enter key and the control panel on the right will display thestocks within the group. These are the stock candidates to consider. Repeat thisprocess for each of the five top groups in the report.Detailed information on the best of Times, Worst of Times Strategy is available bydouble clicking the Best of Times, Worst of Times Opening Bell icon in yourTrading Strategies folder (requires Adobe Acrobat Reader available at tml). Trade by trade details arealso available by double clicking the weakstrong icon (requires Microsoft Excel toview). As with any investment strategy, past performance does not guarantee futureresults.Best of Times, Worst of TimesNOTE: The Group/Sector structure used as a default in this strategy may containless than 5 stocks in certain groups. The priority is to make sure that each group isgiven an equal weighting of cash when purchasing stocks.19
About Jay KaeppelJay Kaeppel is Director of Research at Essex TradingCo., L
in 2000. Therefore, a backtest of a trading system cannot be run using ETF trades but must instead be run on the benchmark indexes that the ETFs track. Here is an example. Before the Nasdaq 100 ETF (QQQ) was traded, this backtest purchased the Nasdaq 100 index. Before the Dow Diamond was trad