Moving average

Trading strategies commonly employed by traders who like to apply technical analysis on stock picking often use moving averages as a buying or selling signal. In my example below I have investigated a great variety of moving average strategies for the Dow Jones Industrial Index for the period of 1930 to 2008

Strategy description: Buy when the x-day moving average goes above the y-day moving average and close the position when the opposite occurs.

The strategy looks certainly very appealing when presented with the right stock at the right time, but when we apply it mechanically for a long time, we can see that it clearly does not work. On the contrary, it leads to a statistically significant unterperformance to a simple buy-and hold.


Buy-and-hold vs. strategy with optimum of x=450 days and y=1875 days still underperforms a simple buy-and hold.

The reason for the underperformance must lie in the fact that the S&P stocks generated a significant return over the last 80 years. When we interrupt those returns in an apparently random pattern (such as when applying the moving average strategy), it clearly leads to a significant underperformance.

 

Here again the details for the optimal strategy (which is still worse then a buy-and-hold):

x: 450 days
y: 1875 days
outperformance_pa: -0.81151
outperformance_pa_leveraged: 3.9124
strategy_performance_pa: 4.7239
strategy_performance_pa_leveraged: 9.4479
buy_hold_performance_pa: 5.5354
strategy_performance: 372.65
strategy_performance_leveraged: 745.29
buy_hold_performance: 436.66
strategy_performance_avg: 46.581
strategy_number_of_trades: 8
buy_hold_number_of_trades: 1
strategy_longdays: 21824
buy_hold_longdays: 28793
strategy_longdays_pct: 75.796
buy_hold_longdays_pct: 100
strategy_avg_trade_duration: 2728
strategy_winning_trades: 4
strategy_winning_trades_pct: 50
strategy_max_drawdown: -18.169
strategy_max_win: 208.52
worst_trade_start: 16946
worst_trade_end: 17639
worst_trade_number: 5
best_trade_start: 19335
best_trade_end: 26545
best_trade_number: 7
periods_pa: 365:

 
 
 
    
     

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Armando Alizo

I'm not sure I agree with this! I ran a back test with the $SPX and a simple 200-day MA (Buy at next day's close if the index crosses above the MA, sell if it crosses below). I started in 1942 as that is the earliest date I have and I used the S&P 500 Tot Return index, but I got similar relative results using the unadjusted index. =========================================== BUY & HOLD CAR: +11.05% Max Drawdown: -55.20% Ulcer Index: 11.78% ========================================== 200-DAY MA CAR: +12.19% Max Drawdown: -21.07% Ulcer Index: 6.09% ========================================== So it certainly does seem that using a MA is a good strategy. If nothing else is reduces Max Drawdown!!