The basis of the rotational trading system is to choose some part of a selected investment universe to invest in on a regular base. It is a supplementary strategy because the decision to which part of the investment universe to invest is based on another strategy/indicator or factor. For example, the investment universe is ranked by fundamental factors or momentum, etc. and then the best performers (or also the worst) are chosen for long (short) positions for a specific timeframe. At the start of every period, the investment universe is ranked again and so forth.
As the rotational system is on the side of supplementary trading strategies, it can be used with almost every strategy. It is the exact opposite of the buy-and-hold approach as the rotational system is rebalancing the portfolio on a regular basis by the chosen factor or strategy.
The most popular rotational system strategy is probably Sector Momentum. Momentum is one of the most researched and profitable anomalies, while the rotational trading systems in equity sectors/industries are nearly as old as equity markets. In the past, both traders and investors have noticed an interesting behaviour of stocks, if we group stocks according to their sectors (industries), distinct sector groups would have different sensitivity to business cycles. By accurately grouping stocks into sectors/industries, the idiosyncratic behaviour of individual stocks is muted, and the effect of the sensitivity of stocks to economic forces on the industry level is strengthened. The rotational system in sector momentum the, for example, invests in three sectors which exhibit the highest momentum at the start of the month.
Other examples of this strategy are the usage of value strategy among country ETFs, various country reversal effects etc.