Would a 5-day below/above the 200-day MA be the same as 1-week above/below a 40-week MA (signal = a weekly bar closes above below the 40-day MA)?

I’m wondering if the results would be the same or similar.

I meant 40-week MA, not 40-day…

Your problem with using a simple moving average in trading is lag, otherwise known as group delay. Moving averages are lowpass digital filters. So, if you insist on using moving averages, do yourself a favor and learn some digital signals processing. DSP will allow you a deeper understanding of lowpass filers and how to better engineer them to suit your needs. The man for DSP in finance is John Ehlers. Read his book called “Rocket Science for Traders” to get your start in DSP.

Excellent post. This post validates my personal research. Robust strategies are in the end really simple, it’s just arriving at that result needs ton of research as you have done in your blog posts Caesar. Thanks for sharing.

Very nice post … always enjoy your backtests. From an emotional point of view, staying the course through huge drawdowns causes a much higher emotional toll than the regret of missing some upside when the market recovers. The unavoidable, can’t sleep at night thoughts … “what happens if this time time is different?”. I’ll take the lower CAR any day, in return for sleeping at night during the drawdowns!

When you combine 2 strategies, its expectation value is the average of individual strategy’s EVs, while the variance generally decreases. Hence the Sharpe ratio improves. The lower the correlation the better the variance reduction.

I essentially take this strategy but leverage it up. When the SPY is above the 200 day MA, I do 2x leverage. When it is below, I am in 1x leverage.

Hi Cesar,

Awesome post. I love how simple solutions such as these can produce some interesting results that warrant further investigation.

I thought you might be interested in this post from Newfound Research below. They include volatility in their SMA calculation and end up with an interesting dynamic moving average.

https://blog.thinknewfound.com/2019/03/time-dilation/

Hope this gives you something to think about over the weekend.

Cheers!

Hi Cesar,
Very interesting strategy for someone, like me, who is essentially a BH type of investor when it comes to his retirement acc.
Wondering tho, what’s the assumption in your results when the TF portion of the 50/50 is not holding SPY?
Are you just holding cash…
Enjoy reading you!
Thanks,

Hi Cesar,
Interesting results although I wonder whether this could be very fortunate timing to be comparing trend following to buy and hold? Since the last 10 years have reportedly been one of the worst in a century for trend-following, whilst the S&P is enjoying one of the longest bull runs in history (although not so for other world indices).

It would be interesting to see a longer backtest of these strategies.

Best regards
Craig

In “The 30-Minute Trader” Laurens Bensdorp advises to exit equities when the SPY closes below the 200-day SMA -1% and I have adopted that rule. He suggests going to cash but it makes more sense to move to long bonds, such as TLT or EDV. As for when to re-enter equities, it makes no sense (to me) to wait until SPY is above the 200-day for 5 days. You’d have been better off to have just held. Plot TLT against SPY. When the “smart money” exits bonds, it’s pretty obvious. That’s when you want to switch back to equities. Did you know that EDV out-performed SPY by 80% in 2008?