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A Few Brief Moving Average Studies at Trader’s Narrative




A Few Brief Moving Average Studies


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This is a guest post by Wayne Whaley, CTA:

From 1970-2009, going long the S&P 500 when it is 1% above its 50 day moving average would yield a 6.59% gain. Going short when the S&P goes 1% below it’s 50 day moving average would result in a 10.15% loss on your short. The net annual return on both longs and shorts for trading such would be -0.17%. I used the 1% filter to avoid the annoying whipsaws on day to day penny swings.

I also ran the 100, 150, 200, 250 and 300 day studies as well. The 200 day crossover was the most profitable of the six I studied, which probably explains why it is popular with analyst, with a 10.85% return on longs and a 3.32% loss on shorts for a net return of 5.89%

And optional approach would be to go long the 200 day moving average when the market goes above it’s 200 day moving average and move to the prevailing T-bill rate when the market goes below it’s 200 day moving average. This strategy resulted in a 9.2% return. The buy and hold strategy with dividends during this period would be 11.5%.

Conclusions:

  1. The 200 Day moving average cross over trading strategy was the best of the six simple moving average systems when the measure of effectiveness was simply return.
  2. However the 200 Day system with a move to cash option has some appeal due primarily to the reduction in risk and elimination of large drawdowns, which traders understand affects their Sharpe ratio.
  3. This particular trend following system has some utility in a longterm trading model but is not the net total solution to trend following and should be used in combination with other forecasting tools.
  4. In all likelihood, the market will not exhibit the exact same trading characteristics over the next 40 years that it has over the last 40 years.

If you enjoyed this, also check out this analysis from June 2009: Golden Cross: Bullish Technical Formation

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2 Responses to “A Few Brief Moving Average Studies”  

  1. 1 SBG

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    Mebane Faber has been preaching this for while now.

    Check out

  2. 2 Scott Teresi

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    I’m confused on some of these figures. What does the 10.85% figure mean? If you’re getting 10.85% when you’re long the market, then why does it fall (to 9.2%) when you invest your cash in T-bills when the market is below the 200-day SMA?

    Thanks if you can clear that up!!

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