5 Moving Average Signals That Beat Buy And Hold...
There is a simple moving average strategy that beat buy and hold investing over the past 20 years. It is not complicated, it is a type of trend following system and only takes one action on the last day of the month to execute it. It almost doubled the returns in the S&P 500 index and cut the drawdown of capital by nearly one third of buy and hold. Unlike mutual funds and hedge funds, a good systematic moving average strategy can beat the S&P 500 index over time by staying long during bull markets and going to cash during bear markets.
5 Moving Average Signals That Beat Buy and Hold...
The 200-day simple moving average of prices is one of the most popular stock market signals and backtesting shows since the year 2000 it has worked best as an end of month signal. Below are the results if an investor simply bought the $SPY ETF and held if price ended the month over the 200-day simple moving average but sold and stayed in cash if the $SPY price was under the 200 day SMA on the last day of the month. This is not the Holy Grail of trend trading the SPY ETF, it is just math. The 2oo-day SMA is lost during bear markets as price falls below it and price also stays above the 200 day SMA during bull markets as it continues to trade in a range or trend higher.
If you are interested in learning more about using moving averages in your trading or want to see how other mechanical moving average signals work you can check out my following educational resources.
Here are my four moving average books:Moving Averages 101: Incredible Signals That Can Make you Money Moving Average Signals That Beat Buy and Hold Tech Booms & Busts for QQQ Moving Average Signals That Beat Buy and Hold are my two moving average eCourses:Backtesting 101 -101Moving Averages 101 -averagesMoving Averages Signals -average-signalsThis post is not investment advice it is for informational purposes only.
Moving averages are price action filters that can identify a trend by which side of a moving average price is trading on. A vertical moving average can show that a chart is in a trend while a horizontal moving average can show that price action is going sideways in a trading range.
A simple price chart of the Merrill Lynch High Yield Master II index, which tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds, underscores the logic behind his approach (see Figure 1, above). During favorable economic periods, money flows into high-yield funds for the attractive income. Investors tend to exit such funds in volatile times in favor of more stable options. The money flows from this behavior can be captured graphically in this simple price chart. When overlaid with a simple moving average, clear buy and sell signals emerge.
My previous article demonstrated that prices become more volatile when they are below the 13 and 52 week averages. This phenomenon is quite well known, although I had never previously seen it expressed as something related to moving averages.
A major theoretical problem with buying above a given average, is that inevitably, a much better entry must have been available below that average. This is somewhat offset by the mitigation of risk of catastrophic loss because one will exit when the stock price is hopefully just below the given average. These two factors might offset one another except transaction costs and other types of friction tend to favor not doing anything as in a buy and hold.
My previous studies of stock moving average position performance included analyzing random groups of major stocks that were above a given average on a certain date with others that were below. There was no discernible difference in performance of one group over the other with any selected moving average. Among other things, this suggests that positive price movement is not uncommon, even if a security is not in an optimal low volatility situation.
The main advantages of the 200 day moving average are simplicity, that it makes you ride the trend, and it makes you play defense. However, without a recession and falling prices, you are unlikely to beat buy and hold because of the many whipsaws. As with most things in life, the 200-day moving average comes with both pros and cons. The 200-day moving average strategy is no silver bullet.
A moving average is the sum of the x last closes divided by the same x. For example, a ten-day moving average summarizes the closing prices over the last ten days and divides the sum by ten. On the next day, the process is repeated by including the most recent close and dropping the eleventh most recent close.
The main idea of a moving average is to capture trends in the market. A moving average is an extremely simple tool to determine the trend: if the close is above the 200 day moving average, the trend is up. If the close is below, the trend is down. This is as simple as it gets.
The chart shows that the moving average took you out in late 2007 at 113 except for a false signal in May 2008. You reentered in May 2009 at 73 and kept you in for a long time when quantitative easing made the markets move higher. Paul Tudor Jones is right in that the 200-day moving average is all about playing defense.
The 200-day moving average works when you have recessions because it takes you out before a bear market hits. It saves you money and you can start compounding again at higher levels when the dust settles.
In other words, the 200-day moving average strategy has almost managed to keep track of the S&P 500 while having substantially lower drawdowns. The downside is that you might face tax bills because of the non-deferred capital gains.
The reason is simple: There are no major recessions. As long as the markets keep going up, the 200-day moving average strategy will get a lot of whipsaws and never keep track of buy and hold.
Jeremy Siegel investigates the use of the 200-day SMA in timing the Dow Jones Industrial Average (DJIA) from 1886 to 2006. His test bought the DJIA when it closed at least 1 percent above the 200-day moving average, and sold the DJIA and invested in Treasury bills when it closed at least 1 percent below the 200 day moving average. He concludes that market timing improves the absolute and risk-adjusted returns over buying and holding the DJIA. Likewise, when all transaction costs are included (taxes, bid-ask spreads, commissions), the risk-adjusted returns are still higher when employingmarket timing, though timing falls short on an absolute return measure.
Moving averages can also be employed in moving average crossover systems. A crossover system is, for example, if you use the 50-day and 200 day moving average and take trades when the shorter moving average (50-day) crosses above and below the longer moving average (200-day). You can even have a 3 moving average crossover strategy. Only your imagination limits the options!
The price behavior in most markets is different depending on a bull or bear market. During a bull market volatility tends to go down, while in a bear market volatility picks up. There are many ways to create a 200-day moving average strategy.
1. Gather the data points for the 200-day moving average. These data points are the 200-day average closing prices of a stock. 2. Plot the data points on a graph. 3. Connect the data points with a line. However, any software platform makes this in a hundredth of a second.
Over the past two decades, a good number of empirical studies have been conducted to evaluate the performance of different trading rules. Earlier studies focus on the appealing Variable-length Moving Average (VMA) rule, which states that a long position should be taken if the short-term VMA is above the long-term VMA, and vice versa. The VMA rule has been proven profitable in many studies. For example, Brock et al.  show that the VMA trading rule generates excess returns in the US market. Hudson et al.  and Mills  also find that the rule is profitable in the FT30 index1. These early studies, however, focus on developed markets. Over the past decade, there is an increasing number of studies on the performance of technical trading rules in emerging markets. One strand of literature examines the currency market. For example, Martin  applies the moving-average rule to 12 emerging currencies and shows that the risk-adjusted return is not significant. Lee et al.  demonstrate that the moving average rule and the channel rule are profitable for the Brazilian Real, the Mexican Peso, and the Venezuelan Bolivar. Ahmed et al.  find that the moving average rule can beat the buy-and-hold strategy in the daily spot exchange rates of Chile, Mexico, Indonesia, the Philippines, South Korea, and Thailand. Craig et al.  show that including emerging market currencies in an investment portfolio substantially increases the Sharpe ratio associated with carry trades. Chong and Ip  demonstrate that the momentum rule is profitable in emerging currency markets.
Another strand of literature focuses on emerging stock markets. For example, Ito  finds profitable technical rules in the stock markets of Indonesia, Mexico and Taiwan. Parisi and Vasquez  show that buy signals generate higher returns than sell signals in the Chilean stock market. Hameed and Ting  find evidence of predictability for the Malaysian stock market. Gunasekarage and Power  conclude that technical trading rules have predictive power in the markets of Bombay, Colombo, Dhaka and Karachi. Kang et al.  find significant returns of momentum strategies in the Chinese A-share market2.
Our trading rules beat the buy-and-hold strategy in the India BSE (Sensex) 30 Sensitive and the Russia RTS Index. The trading-rule profits are attributable to the serial correlation in stock returns. In general, this serial correlation is higher for emerging markets than for developed markets (Harvey ). Note that the Brazilian market is quite efficient. Most trading rules cannot beat the buy-and-hold benchmark, except for the MOM40 rule. Our trading rules slightly beat the buy-and-hold in the Indian market. For the case of Russia, the SMA10 rule generates the highest return. An annualized return of 30% can be achieved for all rules other than the SMA250 rule. The results for China are mixed. The SMA50, RSI14 and MACD rules beat the buy-and-hold strategy, while other rules do not. 041b061a72