With a recent sell signal from my FWB mechanical trading strategy, I will explain what I do when making a sell order and what happens with the funds afterwards.
It is important to understand that I am trading this strategy in my self directed retirement account. This means that I have no immediate tax consequences of trading. People who follow my strategy and trade within a taxable brokerage account will have to pay taxes on any gains they make after selling.
When I make a trade, I enter an order to sell VOO at the open of the next trading day (usually the next Monday if its not a holiday). A “Market on Open” sell order guarantees a fill at the next open, but it does not guarantee a minimum price. I end up selling at whatever the price opens at the next trading day, consistent with the logic I used in my back tested strategy. Weekly opening fill prices can be materially different (better or worse) than the prior week’s closing price.
Alternatively, you could enter a “Limit Order”. This type of order guarantees the price at or above your sell limit, but your order will not be filled if the price is below your limit. For those who intend to use limit orders, you may need to closely monitor the market open and adjust your limit accordingly to get a fill. Its possible that your order limit fill could be better or worse than the result you would have gotten with a market on open order. For example, the market could open lower than your limit, your order doesn't fill, and the market keeps going down after the open. By the time you get your limit order adjusted lower and filled, you could end up with a price below the open. However, sometimes a limit order works in your favor. The open price could be significantly lower than your limit price, but then the market moves higher after the open. In this scenario, you should get a better price than a "market on open" fill would have provided.
After I sell VOO, the funds automatically go into a cash account within my retirement account and stay there until I get my next buy signal. In the interim, I earn the interest rate that my brokerage pays on cash balances. I personally use Interactive Brokers for my self directed retirement account. Last time I checked they paid 4.83% on my cash holdings. If you have more than $250,000 in cash, they also have a free program you can enroll in where they will syndicate your cash across multiple banks so you have higher FDIC insurance coverage. The nice part is that I don't have to do anything to manage this, and I can still buy back into VOO at any time with all of my cash.
While my cash balance is earning interest, I simply wait for the next S&P 500 buy signal. That signal could happen in as little as one week later, or it could be months or even years later in extreme bear market scenarios. If you study the details page by decade, you will see how this mechanical low frequency trading strategy performed through the Great Depression and every decade since.
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