In today’s dynamic market environment, many investors are looking for ways to focus on the strongest market segments while avoiding deep drawdowns. One effective approach is the LTTF (Long-Term Trend Following) strategy, which is based on tracking trends in sector ETFs.
This strategy is not designed to maximize returns at any cost; instead, its goal is to provide exposure to the strongest sectors and reduce market participation during weak periods. It essentially serves as a defensive component within a broader portfolio.
Basic Principles of the Strategy
The principle of this strategy is similar to the well-known “Golden Cross”. It works with a group of 16 tickers, which includes:
- 10 Sector ETFs (Technology, Energy, Healthcare, Financials, etc.).
- 3 Major Indices (SPY, QQQ, and DIA).
- 3 Commodity ETFs (The broad commodity index DBC, Crude Oil, and Gold).
How the Strategy Selects Positions
At any given time, the algorithm selects a maximum of 5 long positions. It ranks candidates based on their performance over the last 20 trading days, giving priority to the strongest ETFs.
Entry Rules:
- The faster moving average (50-period) must be above the slower moving average (200-period).
- The current price must be above the 50-period moving average.
- Market Regime Filter: To improve stability, the strategy only enters new positions if the SPY index is above its own 200-period moving average.
Exit Rules: A position is closed if the price falls below the 50-period average by more than half of the average price range (ATR) over the last 14 bars. This tolerance helps prevent being “kicked out” of a position by minor price swings. Additionally, positions are closed if the overall market (SPY index) enters a downtrend.
Results and Effectiveness
In backtests dating back to 1993, the strategy with the market regime filter achieved an annual return of approximately 6% with a maximum drawdown of around 20%. Without this market filter, the drawdown was significantly higher (34%), which confirms the importance of monitoring the overall state of the market.
If you are interested in this approach, you can clone the strategy directly and start using it or further customizing it within the Algo Cloud environment.
Clone the strategy
Note: Information regarding specific returns and drawdowns is based on backtests presented in the source video; historical performance is no guarantee of future results.