Benefits of a rules-based trading system

On May 1, heavy volume selling in the S&P 500 forced us to cut long exposure in our model portfolio from approximately 38% to 17% by the open on May 2. While we tried to give the current rally the benefit of the doubt on Wednesday, Thursday’s weak action pushed our market timing model into a sell signal, forcing us to cut exposure from 17% to cash on the open today. We are also removing both stock setups from the Wagner Daily watchlist (SWHC and NTES) for now….although each setup could be back on the watchlist sometime next week.

Although we run a very disciplined swing trading system, our market timing model allows us to be flexible and roll with the market when necessary. Our goal with every rally is to always believe in the uptrend until the market gives us a clear sell signal. We held on as long as we could this week, but we had to respect the heavy selling and step out of the way. We never know just how far a market can correct when conditions turn sour, but we really do not need to predict anything. We simply step out of the way and let the market tell us when to come back in. This is the benefit of a rules-based trading system, as it allows us to eliminate most of the emotion out of the equation.