I am just posting this thread in response to another topic ('SP 500 Futures Scalper' and 'SP500/NASDAQ Scalper' 50% off - #51 by ChrisPage)
Can we make money with a simple 200-day moving average?
Here are the trading rules:
Buy if the close of the S&P 500 crosses above the 200-day average, sell when it closes below the average.
It can’t get any simpler than that.
Here is the backtest, from 1960 to July 2021 (we start with 100K in 1960 and re-invest the profits).
The CAGR (Compound Annual Grow Rate) after 187 trades is 6.7%, while the return for Buy and Hold is 7.1% (dividends not included in both cases).
Ending equity is $5,394,489.
So the system is profitable but it seems that a 200-day moving average strategy cannot beat a simple buy and hold system.
Until you realize that the maximum drawdown of the moving average system is 28% (see chart at the bottom), and 56% for buy and hold.
That means with a 2 to 1 leverage, you get the same drawdown than buy and hold but now the return is 13.4%, almost double the return of buy and hold!
As a final note, the S&P 500 (and other indexes) trend very little in the short term, but in the long term the upside bias becomes clear.
