Starting the Momentum Modeling

1. For any period, the lowest ranked FTAlpha issues are sold until 25% of assets are in cash.
2. The assets are used to buy equal dollar amounts of the top 10% of issues based on the FTAlpha score. For example for a family of 40 issues, assets would be divided evenly among the top 4 issues.

Note: if you mimicked your portfolio as suggested above but actually the portfolio is,

1. 60% in Fund X,
2. and if the model suggests adding more Fund X,
3. then, do not add more Fund X.
4. Allocate assets to other high ranked funds.

Using the Spreadsheet to Make Trades

If you are trading monthly, then after updating on the 31st, you would follow the instructions below, and place trades for execution on the close of the next trading day.

1. Load family that represent your holdings. See Mimicking Portfolio above. Compute a Monthly Rebalanced None Model AVG in the green line .
2. Set the Low Risk Basis to the green line.
3. View the Charts. Set the Dashed Pole a month back.
4. Go to the spreadsheet and add an FTAlpha column and a COR column.
5. On the Chart Tab load a diversified family from which you will choose your trades. It should always include funds that you are currently holding
6. Hit the K key to rank the family
7. Sort the Spreadsheet by the FTAlpha column (click the top of the column)
8. Now you are ready to place trades with your broker. Remove or reduce the low ranked funds in your portfolio. Add the high ranked funds.

FT4Web's Model trades 25% of assets each period, but you can vary that. If you trade too much of your portfolio, then you will lose the diversification which is essential. FTAlpha tells you what to add to complement your existing holdings, but if you trade 75% of assets each period, then there will be nothing left for the new holdings to complement.

You don't HAVE to use the same diversified family every period. We DO recommend that you change the family regularly to add new interesting diverse funds.

Weekly and Annual FTAlpha rankings rarely produce desired results. Monthly and Quarterly rankings work better.

Interpretation #1: Building a Portfolio

• Adding issues to your portfolio with high positive FTAlpha Values will improve performance and decrease volatility  of your portfolio. 
• Adding issues with positive FTAlpha and high correlation will improve portfolio performance, but with increased volatility. 
• Adding Issues with Low FTAlpha will hurt portfolio return without reducing risk.
• Adding Issues with Low FTAlpha and low Correlation will hurt return, but may substantially reduce risk. Bear funds often fall into this category.

Interpretation #2: Managing a Portfolio

• Increase your position in issues with high FTAlpha and low correlation. This will reduce volatility and increase return.
• Increase your position in specific issues which have positive FTAlpha. This will increase return and reduce risk.
• Increase your positions in issues with neutral  FTAlpha (hovering around zero) and low Cor=. Reduce  positions in issues with neutral  FTAlpha and high Cor=. This will reduce volatility without hurting return.
• Reduce holdings in issues with negative FTAlpha.
• Consolidate holdings with neutral FTAlpha and high Cor=
• Review issues with negative FTAlpha and low Cor=. These may be providing a comforting hedge (volatility reduction). Consider moving some assets to money market to achieve the same result.
• During periods when the momentum strategy is failing (the Low Risk Basis or the Momentum AVG line has a negative return for the period), then FTAlpha will effectively become a value model:
  
        Take profits on the winners and invest in the losers. This can be disconcerting.
  
  Restated: When Momentum strategy is failing, then the Value Strategy is likely winning. Taking profits on your winners and investing the proceeds in issues that have already fallen is a reasonable, time-honored strategy.

LIMITATIONS:

Ideally, members of your family would be issues that have about the same Standard Deviation( SD= ). If your family contains funds that range from a SD of 1 to 18, then FTAlpha trading will focus on the extreme members and ignore the members in the middle range of volatility. Your results will be poor.

If your family only has 3-5 members, then FTAlpha will pretty much hold all of them in roughly equal portions most of the time. As one member becomes over weighted, it becomes highly correlated with the portfolio and FTApha down rates it to a sell. Ideally, you should trade from a diverse family of 10-100 members.

As with most technical analysis, funds are easier to analyze than stocks. Funds, including sector funds, will be more likely to continue their past volatility and correlation with respect other funds . . . stocks are much less likely to continue their trends.  However, FTAlpha trading does work, but you have to hold 10-20 stocks to achieve risk-adjusted returns approaching a Momentum Model holding 3-6 funds.