Most Popular ArticlesHoly Grail or Fairy Tale, Part I
Mr. Wong,
I read your article about moving averages with great interest. I have also done some work in this area, and have found – using weekly data on the S&P500 since 1980 – that a 40- to 45-week exponential moving average works best to signal buys, but a 60-week exponential moving average works better to signal exits. This is partly intuitive, as a longer moving average to signal sells reduces whipsaws to some extent.
Selling short with the same system is problematic, however. I have found in backtests that using the moving average crossover to signal short entry into the market is far less effective. While it generates more profit, ultimately it has greater drawdowns, higher volatility and more consecutive losing trades.
If you’ve written other articles that address this issue, I would be interested in knowing about them. Meanwhile, I look forward to Part 2 of your Holy Grail article.
Warm regards,
Anonymous
Ted Wong replies:
Dear Anonymous,
Thanks for sharing your research findings. Using different MA lengths for buy and for sell is wise. That's what I use in my own investment systems.
My intent in Part 1 and Part 2 is to demonstrate that a simple active system (MAC) beats buy-and-hold over a century-long time horizon. In Part 3 and/or Part 4, I plan to touch upon the topic of optimization, which might include using short and leveraged instruments.
Best,
Ted
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