Great Alone, Better Together

Winning a championship — or winning in the markets — isn’t about luck. It’s about structure, discipline, and putting the right pieces in the right places.  

A championship basketball team consists of different players in various roles, all working toward the common goal of winning. The team is a composite model of individual players. 

As the General Manager of a basketball team, your job is to put together a team of complementary players that can gel and play nicely together. Every great team starts by getting the superstar as the “base” of the team.  The superstar is the stalwart that you can rely on to consistently deliver. But the superstar needs help and can’t do it alone. This is where the GM needs to add pieces that can complement the skill set of the superstar. 

Michael Jordan is the greatest and most recognizable basketball player of all time. But it took Jordan seven seasons — and the right teammates — to finally capture his first title. 

Why? The Chicago Bulls needed to have the right mix of players that complemented Jordan’s skill set.  He needed a defensive center to help with rebounding, a pass-first point guard who could shoot wide open 3’s when Jordan was doubled, an agile versatile running mate to take the pressure off in crunch situations, and a mentality of making sure the “right” players play at the “right” time.

Source: ESPN

Everyone on the team has a role to play. The magic happens when they come together, and each player performs their job to the best of their ability. Championships aren’t won by individuals — they’re won by teams.  

At Potomac, that’s exactly how we think about managing money.  We don’t rely on a single idea or system. We build composite models — teams of trading systems — designed to work together, complementing each other’s strengths, just like the players on a title-winning roster.

But not every system makes the cut. Each trading system must prove itself through rigorous in-sample and out-of-sample testing, low correlation to existing systems, and clear alignment with our risk and return objectives. 

Our focus is on blending systems that not only perform well individually but also enhance the strength of the composite model — much like assembling a team where each player brings a complementary skill to maximize the team’s overall performance. 

Individual Trading Systems (Players) 

We combine rigorous in-house research with the proven ideas of renowned market legends to build our trading systems. 

Our process starts with our internal research team, which designs and tests trading systems based on historical financial and raw stock market data. Alongside this, we study and adapt publicly available systems created by some of the most respected figures in market history — individuals like Nelson Freeburg, Martin Zweig, John Bollinger, and others. 

We don’t simply copy these systems; instead, we analyze, test, and customize them to ensure they meet our standards for risk management, performance, and consistency. This dual approach,blending innovation with time-tested ideas, helps us create trading systems that are both robust and resilient across a variety of market conditions. 

Each trading system can be in one of the two states regarding investment position: invested or in cash. These systems all have unique characteristics, including but not limited to:

• Time in the Market (Exposure) 

• Average Annual Return 

• Maximum Drawdown 

• Number of Trades 

• Winning Percentage 

In addition to these metrics, we analyze the correlation between systems to ensure that each adds unique value to the composite, avoiding unnecessary overlap and strengthening the model’s diversification and robustness.

This level of analysis is no different than the GM of a championship team evaluating players for popular basketball stats such as Player Efficiency Rating (PER), True Shooting Percentage (TS%), Usage Rate (USG%), Defensive Rating, and Assist-to-Turnover Ratio (AST/TO).

The Types of Systems (Players) We Look For

The individual systems we employ can loosely be grouped into two categories: Base Systems and Trigger Systems. 

Base Systems help determine the prevailing market regime—bullish or bearish—and assess the likelihood of that regime remaining in place. These systems are designed for total market analysis, trade infrequently, and attempt to capture long-term trend changes. As a result, they tend to have higher exposure in terms of time spent in the market. 

An example of a base system we could use is a momentum system, which is a riff on a system originally created by the late Nelson Freeburg. This system is designed to obtain long-term trend exposure, capitalizing on the historic upward bias of the S&P 500 and considers multiple inputs:

• The trend in the S&P 500

• The trend in the NYSE Advance-Decline Line (breadth analysis) 

• Trends in bonds and transportation stocks (intermarket analysis)

While this type of base system can be used in isolation, we must get confirmation from complementary systems to be invested. There needs to be more—there needs to be a Trigger System. 

Trigger Systems 

Trigger Systems are designed to capture short-term market inefficiencies that can generate high returns while they are invested. Unlike base systems, trigger systems do not remain in the market for extended periods of time. 

An example of a Trigger System is our Volume Thrust System. Volume thrust occurs when we see a sudden and significant increase in trading volume in rising stocks. When an influx of buyers enters the market suddenly, the probability of above-average short-term gains increases. 

The Trigger System itself spends less time in the market, but when used in conjunction with a Base System, the odds of a positive outcome improve compared to using the Trigger System alone. 

Another Trigger System we employ is designed to activate when the market environment is unfavorable. This system uses the CBOE S&P 500 Volatility Index (VIX) as an input and takes advantage of short-term anomalies in bearish conditions—when the market drops “too far, too fast.” This Trigger System recognizes that markets do not decline in a straight line, so it enters when fear has become excessive and exits within a short period of time. 

Base Systems set the foundation, determining the broad market stance — bullish, bearish, or neutral. Trigger Systems act tactically, exploiting short-term market inefficiencies. Together, they form a layered process that balances long-term positioning with short-term opportunity capture. 

The systems above highlight the agility and robustness of the model as we are able to obtain exposure in bullish and bearish regimes.  

Potomac’s Composite Models (Team Building) 

Managing risk is central to our process. Each system’s impact on the composite model is evaluated not just individually, but in terms of how it interacts with the other systems — measuring contribution to volatility, drawdowns, and overall stability. We aim to maximize the composite’s collective strength, not just the sum of its parts. 

Each of the trading systems is tested separately and can be used independently to trade the market.  

However, we believe that while these systems are “good alone,” they are better together, as a team.  

The composite model is built to combine the right systems that work together at the right time. 

The final composite models are designed to address three key aspects of our investment process: 

1. Identify the intermediate-term trend of the stock market—whether it is up, down, or sideways. 

2. Assess the health of the current trend through breadth analysis: 

   • Breadth measures… 

     1. How many stocks are rising versus falling. 

     2. How many stocks are making new highs versus new lows. 

     3. How much volume is traded in advancing stocks versus declining stocks. 

   • In a healthy bullish trend, we expect to see more stocks rising than falling, higher trading volume in advancing stocks than in declining ones, and more stocks making new highs than new lows. 

3. Confirm the current trend using intermarket themes: 

   • 
     

   • Intermarket analysis examines relationships across different markets or asset classes to infer insights into the market being traded. 

   • For example, stock market investors may look for cues from fixed-income or commodity markets. 

   • Similarly, investors in a broad index like the S&P 500 may seek confirmation from narrower market segments, such as transportation stocks. 

Conclusion 

At Potomac, we believe that a well-structured, rules-based investment process is key to navigating the complexities of the market. Just as a championship team is greater than the sum of its parts, our composite models are designed to work together leveraging the strengths of diverse trading systems to enhance decision-making and improve overall outcomes. 

Our composite models are dynamic by design. We continuously monitor system effectiveness, market dynamics, and interrelationships among systems. This ongoing diligence ensures that our models adapt intelligently to changing environments, maintaining resilience, balance, and opportunity captured through all phases of the market cycle. 

No single system has all the answers, but together, they provide a robust framework for determining when and how to invest. 

PFM-605-20250717