Large Cap Vs Small Cap Rotation Strategy (Trading Rules In Plain English)
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Trading Rules:
For the rotation system we are going to use the IJR (iShares Core S&P Small-Caps) and SPY (S&P 500) ETFs. Firstly, we are going to calculate the ratio between these two ETFs by simply dividing IJR and SPY. Then, we calculate the 14-day RSI of the ratio and a 5-day simple moving average of the RSI. Once we have that, the strategy is pretty simple:
- We buy the SPY when the 5-day SMA of the RSI is over the RSI level.
- We sell and buy IJR when the 5-day SMA of the RSI is under the RSI level.
The strategy could be classified as a momentum trading strategy.