Great article on the power of combining factor investing with a systematic momentum overlay. It’s rare to see a strategy that effectively mitigates the decade-long underperformance periods often seen in pure factor plays.
Have you tested how sensitive the CAGR is to the specific look-back period—for instance, does using a 6-month vs. a 12-month momentum window significantly change the drawdown protection results?
I have tested every possible look-back period with the monthly data. The CAGR stays significantly above market level, regardless of the lookback period, but the alpha gradually declines the further I move away from the selected monthly intervals, as you would expect.
So, it seems the system would do well with most settings, but I optimized it for the most consistent outperformance based on the 2000-2020 data.
You can feel the years of trial and patience behind this. The discipline to stick with a system is what most people struggle with. It’s a steady approach that seems to value consistency over excitement.
It does require discipline to stick with a system.
And yes, my main priority was to build a system with high consistency in the returns. There are lots of trading systems available that deliver higher CAGRs but with much higher volatility. Personally I don't have the risk profile to stick with these, so I had to invent my own.
I’ve been following MarketFighter’s site pretty much since the early days — mostly just reading quietly and trying to understand the logic behind the strategy. Over time, the consistency of the updates and the transparency really kept me coming back.
One thing I was curious about was whether the returns in USD would match the EUR version. After checking it myself, the USD performance is basically similar, and in some periods even a bit higher. That gave me enough confidence to stop watching from the sidelines.
So I ended up buying the suggested ETF strategy myself — and yes, the returns are real. Not backtests, not theory. Actual results in my own account.
Big thanks to MarketFighter for putting the work into this. I have decided to subscribe because it’s rare to find something that’s both simple and actually holds up when you test it on your own.
Just sharing this for anyone else who’s been quietly observing like I was.
You should execute the trade after you receive the monthly trade signal in your inbox. Ideally on the first day of the month, but the sooner the better.
The whole back-test and my five years of trading the system in real life have been based on trades executed at the turn of the month or on the first trading day of the month.
I haven’t, because we don’t have access to these as retail investors in the European Union. But historically, they would most likely have performed better in the crisis years but also introduced more volatility.
Really enjoyed reading this because it focused on something many investors overlook: the importance of having a repeatable process. Outperformance rarely comes from chasing every market trend or constantly reacting to noise. More often, it comes from having a clear framework, staying disciplined, and sticking to it through different market cycles.
What stood out to me is that good investing often looks boring from the outside. It is patience, consistency, and sound decision making under uncertainty repeated over time. That is where the real edge usually comes from. Great breakdown.
Well said, and thanks, I appreciate it! 🙏 You’re absolutely right. Patience, discipline, and consistency can take you far, and that combination seems to be underrated.
Really enjoyed this — the honesty about your 15-year journey before finding what actually worked is refreshing. Most people only share the wins.
The psychological point resonates deeply: knowing a factor works over 20 years means nothing if you capitulate during a 3-year drawdown. That's where most retail investors (and honestly, some institutional ones too) fall apart.
As a former institutional portfolio manager, I used sector dispersion within the S&P 500 extensively - and during periods like the COVID crash, exploiting those gaps allowed me to generate meaningful outperformance for my clients' portfolios.
Curious -when you're rotating between ETFs, how do you handle sectors where the factor signal conflicts with the macro backdrop? For example, Value has screamed "buy" on certain Financials for years, yet macro headwinds kept suppressing returns. Do you follow the signal mechanically, or is there a qualitative override in your system?
The system is entirely based on monthly price levels and the relative momentum of these. It does not take macro backdrop, fundamental data, personal opinions, emotions or any other qualitative parameters into account.
Eliminating all of this noise and emotions and simply relying on the academically proved factors of excess returns is what has caused the results you see :-)
Thanks for the article. As a fellow computer scientist I loved reading this and your approach. I've downloaded the stock data for the last few years, calculating all the technicals for each stock and running various queries with a view to something similar in an individual sock basis, but your approach is so elegantly simple (appreciate the work to get there wasn't!). Will definitely give this a try.
Thanks, I really appreciate your comment! I've been down that road with individual stocks as well, attempting to build a similar system, but I didn't manage to find the same consistency as I did with the ETF setup. It was too volatile for me :-)
The quality factor section resonates most. The reason quality outperforms over long periods isn't random. It's because businesses with high ROIC and consistent profitability have structural advantages that compound the same way the returns do.
The psychological challenge you describe is real. Most investors abandon quality factor strategies during underperformance because they don't understand why quality works. The fundamentals tell you why.
That's what makes it possible to hold through the difficult periods.
Factor investing is academically credible and practically humbling. Value was dead for a decade. Momentum crashes violently. Low volatility underperformed in the longest bull run in history. The factors work — on a timeline most investors can't emotionally survive.
Action: Look up the maximum drawdown and longest underperformance period for each factor cited — then decide honestly if your patience actually matches the strategy's requirements
Exactly. Investing in individual factors is practically impossible to hold on to during the inevitable bad periods. That's what my strategy aims to solve by rotating into the recently strongest factor and abandon the rest. But you are absolutely right regarding the use of individual factors.
Really interesting blend of factor rotation and momentum filtering. The consistency of returns and drawdown control is probably the most impressive part here, especially compared to traditional buy-and-hold indexing.
This looks like a good system but CAGR alone is insufficient for me. I would take a lower CAGR for less drawdown and volatility. From the chart, your system looks like it has low volatility. What is the Max Drawdown, Max Recovery, Sharpe, and volatility?
We're in the same boat :) You can find other systematic strategies with higher CAGR than mine, but it usually means higher risk, more volatility, deeper drawdowns. Here are the numbers I have calculated for the strategy:
Sharpe ratio: 1,13
Sortino ratio: 2,01
Max drawdown: 15,23% in 2020
Max recovery: 20 months in 2007-2009
These numbers are only based on monthly closing prices. The max drawdown was most likely higher at some point intra-month.
Thanks for the data! Good numbers. Yes, the daily MaxDD will be higher by probably 2 percentage points. I have a related system (rotational momentum) that I will write about in the future on my Substack, but it’s through the lens of retirement where you don’t have time to make up for deep drawdowns if you are drawing down your portfolio to live on. So you give up CAGR for MaxDD of around 10% or less.
Great article on the power of combining factor investing with a systematic momentum overlay. It’s rare to see a strategy that effectively mitigates the decade-long underperformance periods often seen in pure factor plays.
Have you tested how sensitive the CAGR is to the specific look-back period—for instance, does using a 6-month vs. a 12-month momentum window significantly change the drawdown protection results?
Thank you! Appreciate your comment 🙏
I have tested every possible look-back period with the monthly data. The CAGR stays significantly above market level, regardless of the lookback period, but the alpha gradually declines the further I move away from the selected monthly intervals, as you would expect.
So, it seems the system would do well with most settings, but I optimized it for the most consistent outperformance based on the 2000-2020 data.
Thank you for the knowledge 👏
You can feel the years of trial and patience behind this. The discipline to stick with a system is what most people struggle with. It’s a steady approach that seems to value consistency over excitement.
Thanks for the words! 🙏 You are absolutely right.
It did take many years to reach this point.
It does require discipline to stick with a system.
And yes, my main priority was to build a system with high consistency in the returns. There are lots of trading systems available that deliver higher CAGRs but with much higher volatility. Personally I don't have the risk profile to stick with these, so I had to invent my own.
I’ve been following MarketFighter’s site pretty much since the early days — mostly just reading quietly and trying to understand the logic behind the strategy. Over time, the consistency of the updates and the transparency really kept me coming back.
One thing I was curious about was whether the returns in USD would match the EUR version. After checking it myself, the USD performance is basically similar, and in some periods even a bit higher. That gave me enough confidence to stop watching from the sidelines.
So I ended up buying the suggested ETF strategy myself — and yes, the returns are real. Not backtests, not theory. Actual results in my own account.
Big thanks to MarketFighter for putting the work into this. I have decided to subscribe because it’s rare to find something that’s both simple and actually holds up when you test it on your own.
Just sharing this for anyone else who’s been quietly observing like I was.
That’s great to hear, thank you so much for sharing this! 🙏
I love this! This is exactly the kind of edge I’ve been looking for 🙏 Subscribed and looking forward to follow!
When exactly are the trades supposed to be executed?
Thank you so much, I really appreciate this!
You should execute the trade after you receive the monthly trade signal in your inbox. Ideally on the first day of the month, but the sooner the better.
The whole back-test and my five years of trading the system in real life have been based on trades executed at the turn of the month or on the first trading day of the month.
Have you ever backtested a short ETF when you go to cash ?
I haven’t, because we don’t have access to these as retail investors in the European Union. But historically, they would most likely have performed better in the crisis years but also introduced more volatility.
Having trouble with subscribing on substack .. please send me a link.
Try this url in a web browser: https://www.marketfighter.com/subscribe
Hi, have you posted the drawdown of the strategy anywhere?
Hi! You can find some more detailed return data in my latest post here: https://www.marketfighter.com/p/behind-the-scenes-of-a-502-excess
Really enjoyed reading this because it focused on something many investors overlook: the importance of having a repeatable process. Outperformance rarely comes from chasing every market trend or constantly reacting to noise. More often, it comes from having a clear framework, staying disciplined, and sticking to it through different market cycles.
What stood out to me is that good investing often looks boring from the outside. It is patience, consistency, and sound decision making under uncertainty repeated over time. That is where the real edge usually comes from. Great breakdown.
Well said, and thanks, I appreciate it! 🙏 You’re absolutely right. Patience, discipline, and consistency can take you far, and that combination seems to be underrated.
Really enjoyed this — the honesty about your 15-year journey before finding what actually worked is refreshing. Most people only share the wins.
The psychological point resonates deeply: knowing a factor works over 20 years means nothing if you capitulate during a 3-year drawdown. That's where most retail investors (and honestly, some institutional ones too) fall apart.
As a former institutional portfolio manager, I used sector dispersion within the S&P 500 extensively - and during periods like the COVID crash, exploiting those gaps allowed me to generate meaningful outperformance for my clients' portfolios.
Curious -when you're rotating between ETFs, how do you handle sectors where the factor signal conflicts with the macro backdrop? For example, Value has screamed "buy" on certain Financials for years, yet macro headwinds kept suppressing returns. Do you follow the signal mechanically, or is there a qualitative override in your system?
Thanks, I appreciate your comments!
The system is entirely based on monthly price levels and the relative momentum of these. It does not take macro backdrop, fundamental data, personal opinions, emotions or any other qualitative parameters into account.
Eliminating all of this noise and emotions and simply relying on the academically proved factors of excess returns is what has caused the results you see :-)
Thanks for the article. As a fellow computer scientist I loved reading this and your approach. I've downloaded the stock data for the last few years, calculating all the technicals for each stock and running various queries with a view to something similar in an individual sock basis, but your approach is so elegantly simple (appreciate the work to get there wasn't!). Will definitely give this a try.
Thanks, I really appreciate your comment! I've been down that road with individual stocks as well, attempting to build a similar system, but I didn't manage to find the same consistency as I did with the ETF setup. It was too volatile for me :-)
The quality factor section resonates most. The reason quality outperforms over long periods isn't random. It's because businesses with high ROIC and consistent profitability have structural advantages that compound the same way the returns do.
The psychological challenge you describe is real. Most investors abandon quality factor strategies during underperformance because they don't understand why quality works. The fundamentals tell you why.
That's what makes it possible to hold through the difficult periods.
Factor investing is academically credible and practically humbling. Value was dead for a decade. Momentum crashes violently. Low volatility underperformed in the longest bull run in history. The factors work — on a timeline most investors can't emotionally survive.
Action: Look up the maximum drawdown and longest underperformance period for each factor cited — then decide honestly if your patience actually matches the strategy's requirements
Exactly. Investing in individual factors is practically impossible to hold on to during the inevitable bad periods. That's what my strategy aims to solve by rotating into the recently strongest factor and abandon the rest. But you are absolutely right regarding the use of individual factors.
Really interesting blend of factor rotation and momentum filtering. The consistency of returns and drawdown control is probably the most impressive part here, especially compared to traditional buy-and-hold indexing.
YTD using this?
As of May 1st, it was up 16.31% YTD. You can find more info in the monthly performance reports I publish.
This looks like a good system but CAGR alone is insufficient for me. I would take a lower CAGR for less drawdown and volatility. From the chart, your system looks like it has low volatility. What is the Max Drawdown, Max Recovery, Sharpe, and volatility?
We're in the same boat :) You can find other systematic strategies with higher CAGR than mine, but it usually means higher risk, more volatility, deeper drawdowns. Here are the numbers I have calculated for the strategy:
Sharpe ratio: 1,13
Sortino ratio: 2,01
Max drawdown: 15,23% in 2020
Max recovery: 20 months in 2007-2009
These numbers are only based on monthly closing prices. The max drawdown was most likely higher at some point intra-month.
Thanks for the data! Good numbers. Yes, the daily MaxDD will be higher by probably 2 percentage points. I have a related system (rotational momentum) that I will write about in the future on my Substack, but it’s through the lens of retirement where you don’t have time to make up for deep drawdowns if you are drawing down your portfolio to live on. So you give up CAGR for MaxDD of around 10% or less.
Thanks for the informative article. I subscribed.
Congratulations ... these are impressive results.
Thank you!
Interesting, you have my attention!🍻
Can i have permission to reference your post in my next post? I will do some research on how combining our methods would have performed
Of course you can 😊
thank you