Binary Switching: All-or-Nothing Allocation Between Two States

Binary switching is an allocation method where the portfolio holds exactly one asset at all times — either the risk-on winner selected by the strategy's momentum signal or the risk-off defensive asset. There is no partial allocation, no gradual transition, and no diversification within the portfolio at any given moment. The portfolio is always in one of two states: fully invested in the selected risk asset, or fully invested in the defensive alternative.

How It Works

Each month, the strategy evaluates its signal — a relative strength comparison, an absolute momentum check, a canary gate, or a combination. If the signal indicates favorable conditions, the entire portfolio goes to the risk-on winner. If unfavorable, the entire portfolio goes to the defensive fallback (typically bonds or cash). The transition is complete and immediate — from 100% equities to 100% bonds in a single trade.

Why All-or-Nothing

The binary approach is a deliberate design choice, not a simplification. Gary Antonacci argued in his dual momentum research that partial allocations introduce additional parameters — how much to allocate, how quickly to transition, what triggers each step — that can be optimized to fit historical data but may degrade out-of-sample performance. The all-or-nothing approach eliminates this optimization risk by removing all sizing decisions. The signal either says "yes" or "no," and the portfolio responds accordingly.

The binary model maximizes the impact of correct signal readings. When the momentum signal correctly identifies a strong equity trend, 100% exposure captures the full upside. When the signal correctly identifies deteriorating conditions, 100% defensive allocation provides maximum protection. The approach bets everything on signal accuracy.

Strategies That Use Binary Switching

Binary switching is the most common allocation method on the platform, used by 19 strategies:

• GEM — SPY, VEU, or AGG
• ADM and ADM-IP — SPY, SCZ, or TLT/TIP
• VAA-G4 — best offensive or best defensive
• DAA — single best asset per regime
• HAA-S — SPY or best defensive
• Paired Switching — SPY or TLT
• Quint Switching — best of 5 assets
• Plus growth-trend timing, global growth cycle, and other macro-driven strategies

The Trade-off

The binary approach produces higher volatility than diversified alternatives because the portfolio carries the full risk of whichever single asset it holds. A signal error — entering equities one month before a drawdown or exiting one month before a recovery — affects 100% of the portfolio. Strategies that hold multiple positions absorb such errors across a diversified portfolio, reducing the per-error impact but also reducing the per-correct-call benefit.