Trading Plan - 401k Investments

NOTE:  THIS IS A PRELIMINARY DRAFT OF A TRADING PLAN THAT NEEDS TO BE FINALIZED WITH HISTORICAL RESEARCH.  DO NOT USE THIS FOR TRADING OR INVESTING.

Below is my written trading plan describing the aspects of my 401k investment strategy such as market breadth, entry/exit criteria, and risk management.  I am continually researching improved methods for the system, therefore this is a fluid document that will be updated as needed.  All times are central time zone.

Objective:
To invest in two different mutual funds, a bond index fund and a 2x leverage stock index fund.  The portfolio should remain invested 100% of the time, with the allocation to the bond and stock fund changing based on market behavior.  The portfolio allocation should be rebalanced on a weekly basis, but each fund should be held for a target of 30 days before changing the position to avoid short-term trading fees.  The goal of the portfolio is to produce an average annual return >15% with max annual drawdowns remaining <15%.

Timeline of Trading Tasks:

• Each evening all market indicators will be updated and tracked.
• Each weekend the market behavior will be evaluated and the portfolio allocation will be determined.
• The fund orders will be placed each Monday morning if changes to portfolio allocation are required.

Market Breadth:

• Calculate market breadth indicator after the market close each evening.
• There will be three measures of market breadth:  stocks up/down 25% in the past 65 days, stocks creating new highs/lows in the past 5 days, stocks creating new highs/lows in the past 52 weeks, number of stocks with SMA10 and SMA20 crossover, and a comparison of SMA 10 and SMA 20 for the IWM.
• Other measures of market breadth may be evaluated in the future and replace one of the measures listed above, but the system should rely upon at least 4 different measures of market breadth.
• Daily or weekly charts may be used to determine the state of the indicator - the time frame will be determined by historical research.
• All stocks used in market breadth calculations have an average daily volume greater than 100,000 shares and closing price greater than $1.00.

Portfolio Allocation Criteria:

• Portfolio allocation will be based on the readings of the market breadth indicators.
• The market will be split up into 7 different behavior zones:  very bullish, bullish, slightly bullish, neutral, slightly bearish, bearish, very bearish
• Very Bullish Allocation =0% bonds and 200% stocks (all 4 indicators bullish)
• Bullish Allocation = 25% bonds and 150% stocks (3 of 4 indicators bullish)
• Slightly Bullish Allocation = 60% bonds and 80% stocks (to be determined)
• Neutral Allocation = 80% bonds and 40% stocks (2 of 4 indicators bullish/bearish)
• Slightly Bearish Allocation = 85% bonds and 30% stocks (to be determined)
• Bearish Allocation = 95% bonds and 10% stocks (3 of 4 indicators bearish)
• Very Bearish Allocation = 100% bonds and 0% stocks (all 4 indicators bearish)

Risk Management:

• The portfolio allocations have been sized to create a max drawdown of 15% over the past 10 years of historical data.
• Future drawdowns may exceed the historically tested drawdown of 15%, but the portfolio should be 100% allocated to bonds in this instance.  So the portfolio should exhibit a drawdown much smaller than the overall market.
• Possible hedging strategies should be evaluated in the future to maintain a worst case drawdown of 15%.