Disclaimer

This blog is for educational purposes only

Sunday, March 3, 2013

A simple trading strategy

In my conversations with ordinary folks like myself, I am often asked if there exits a simple but a profitable strategy to build a retirement portfolio.  My answer to them is always, yes, but...
Why but?
Because, in implementing a number of strategies to invest in stock markets in the last 25+ years, I have come to conclude that most of the time it is not the strategy but it's execution that fails.
Why?
May be because while evaluating a strategy, we are mostly oblivious to the environment in which it was being executed, but as we start to implement the strategy, those elements hinder the execution. News, opinions, personal situations, and the uncertainty (this time is different) are few that fall in this category.
So, after but I say "if you believe in it and can execute it as directed".

So if you are the person  looking for a strategy to built your retirement portfolio, I present you with this time tested simple to implement strategy for a consideration.

Trade Entry:
Buy SP500 on the next day open when EMA18 crosses above EMA43 on a weekly chart of SP500 and sell when EMA18 crosses under EMA43.

Here are the STATS of this strategy since 1970.
While STATs are good, these don't tell the whole story of trading. So to feel more about the strategy let's look at this entire trade series (as shown on these two charts).  Entries on these charts are marked in green (arrow and vertical line) and exits in red.
Notice this strategy effectively avoided most corrections in the '70 and since 2000. However, the strategy could not avoid the crash of  '87, correction of fall of '98. waterfall decline of 2011, and few other minor corrections since 2009. But despite these hiccups strategy returned ~575% more than B&H.

Now, what you do think of this strategy? I would like to know.

2 comments:

  1. Since this is a long only strategy, have you considered some filter to close the trade during crash and crash-like events? My rule of thumb is shorter term trading is to close the trade when 20% of the unrealized gain is given back. Have you tried some such in your models?

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  2. Geo,
    While this looks like an appealing way to avoid catastrophic losses like that of '87 crash, it will not help to improve the performance. A 20% stop loss from unrealized gain will result in multiple exits. For example, while this would have saved you ~ 10% loss due to '87 crash, you will also have booked a 20% loss in the fall of '98.

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