Paired switching
PortfolioIntermediate
Paired switching holds one of two related assets at a time, choosing the one with the stronger recent return, and moves to the other when the ranking flips. A typical pair is a risky asset and a defensive asset, or two sectors that compete for the same capital. It is a tiny relative-strength system. With only two choices, the rule is easy to understand and easy to overfit.
Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.
- Rules
- Pick the pair in advance, such as a stock index and a bond index. Each month, hold the one with the higher return over a stated lookback, often several months, and hold it until the next rebalance. Include a minimum gap so a tiny difference does not trade. Stay in cash only if the rules name a third asset. Do not change the pair after a bad year.
- Where AI fits
- AI can test one pair and one lookback on a sample that ends before the evaluation window. It can count switches and subtract costs. It should refuse a search across dozens of pairs that keeps the winner. The honest output includes the periods where the switch lags both buy-and-hold paths.
- Markets
- Two liquid funds or futures that you can rotate without changing the economic bet, such as equity and Treasury indexes.
- Timeframes
- Monthly.
- Risks
- Two-asset switches whipsaw when leadership flips every month. The lookback and the pair are powerful degrees of freedom. Taxable accounts realize gains on every switch. A rule that would have rotated into the winner last decade is not a plan for the next one.