Better Than Buy and Hold

C

Corso482

Tell me what's wrong with my logic--

Let's say we agree to buy SPY whenever it crosses above it's 50 day MA, hold it, and only sell when it crosses back below.

If it is in fact true that over the next 50 years, the market will go way up, then it's true that the market will spend the vast majority of those up periods above its 50 day MA. Therefore, if we agree to buy and hold whenever it's above it's MA, then we'll be along for the ride for the vast majority of the bull market.

If, however, the predicition is wrong, and over the next 50 years there's a major decline, then the market will spend the vast majority of that decline below its 50 day MA; therefore, because we do not hold the market when its below its 50 day MA, we'll preserve our capital in periods of decline.

In conclusion, buying and holding SPY/QQQ in the manner described above will allow you to ride bull trends in the coming days and avoid any declines.

Therefore, this simple strategy is better than buy and hold because it allows you all the benefits of buy and hold without the risk.

Where am I wrong?
 
The problem is how u take into account whipsaw. There can be months where the market goes no where just chopping up and down in a range.. also there will be times when u get a long entry.. ride the trend and are up say %15 then market sells off hard and slices 50ma and u end up %5... for the duration of a few months.

In an ideal trendy market this strategy will print money.. 2003 was an example of a trending market.. but look at the QQQ and 50ma for 2004.. whipsaw city. By the time the market breaks and the real trend asserts itself u would already be in a moderate sized draw down.


--MIKE
 
Quote from Corso482:


Where am I wrong?
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You're wrong because:

1. If you limit your trading to price that is above an MA, you will have missed many very profitable trades that occur when the market pulls back below an MA then rallies.

2. You are assuming that in buying above an MA and selling when it crosses below, that you will always profit, because the MA will continue to rise. This is a false assumption. In many cases, this will result in a loss, because an instrument that is above an MA is often more likely to revert to the mean (fall) than to continue upward.
 
Quote from Trend Fader:

The problem is how u take into account whipsaw. There can be months where the market goes no where just chopping up and down in a range.. also there will be times when u get a long entry.. ride the trend and are up say %15 then market sells off hard and slices 50ma and u end up %5... for the duration of a few months.

In an ideal trendy market this strategy will print money.. 2003 was an example of a trending market.. but look at the QQQ and 50ma for 2004.. whipsaw city. By the time the market breaks and the real trend asserts itself u would already be in a moderate sized draw down.


--MIKE
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You're right, you'll make no money in a whipsaw market. In fact, you'll lose on comission. But I'm not saying this is a good trading strategy. I'm saying that it's better than buy and hold.

If you're a buy and hold investor, it's better to be whipsawed for tiny losses than to ride down a 70% decline in the nasdaq. And in the ideal markets, e.g. 90's and '03, you'll be along for the ride, which is the same as you would've done with buy and hold.

So you get the benefits of buy and hold without the risks. The only negative of the strategy is whipsawing, which, in my opinion, is preferable to bottomless declines that "buy and hold" requires you ride out.
 
Quote from lindq:

You're wrong because:

1. If you limit your trading to price that is above an MA, you will have missed many very profitable trades that occur when the market pulls back below an MA then rallies.
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I'm not talking about trading, I'm talking about a buy and hold mentality. Such a mentality doesn't care about profitable trades. It cares about catching the large moves over the long term, which this strategy would do.

Quote from lindq:

2. You are assuming that in buying above an MA and selling when it crosses below, that you will always profit, because the MA will continue to rise. This is a false assumption. In many cases, this will result in a loss, because an instrument that is above an MA is often more likely to revert to the mean (fall) than to continue upward.
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No, I'm not assuming I will always profit. This goal of this strategy is not to make a consistent, objective profit. It's to outperform buy and hold.
 
if you are into very (very) long term theories, like this 50 ma, take a long hard look at the classic Dow Theory. There are newer versions of it that do not have you in the market all the time, and have great success. You would have better results using these than the 50 month ma; it assumes too much that stocks will always uptrend and by its very nature lags considerably. You may be facing massive losses if you wait for the moving average to catch up with a bearish state of the economy.
 
Unless the market is trending it is not a better strategy than buy and hold, it is quite likely worse. This is easily proven with backtesting.

With this strategy it is even very possible to LOSE money substantially while the B&H investor MAKES money. Again easily demonstrated through backtesting.

It is easy to find a market period that "proves" your theory right. It is easy to find a market that proves your theory wrong. Which period is coming next?

JB
 
I doubt very simple short-term MA systems beat buy/hold over long periods of time (edit: this on an index. some will work on stocks) And if you add lots of conditions and filters you run the risk of curve fitting. Note that this is very easy to test for free over at Wealth-lab.

There is strong evidence, however, that simple long term MA systems do work better than buy/hold. At least, on a "risk adjusted" basis. In Stocks for the Long Run, Siegel tested a 200DMA system on the Dow from 1886-1997. This system was simply to Buy when the close was at least 1% above the 200, and Sell when the close was 1% below. When out of the market, Treasuries were bought. The 1% band is to help avoid whipsaws.

If transaction costs were included he figured that the returns were about equal to buy/hold, but since you would have been only been in the market about 2/3 of the time you would have done much better risk-adjusted. And you would have avoided several bad crashes.
 
A simple backtest shows that if you had bought the S&P as represented by SPY in June 1994, and held until now, your investment would have increased roughly 245%.

However, following the proposed strategy of buying when price crosses a 50 day MA and selling when it falls back below the same MA, the gain would have been approximately $20 thousand dollars, assuming you would have bought 1,000 shares of SPY on each trade. This does not include commish, slippage or trading costs.

So clearly this particular strategy was far inferior to buy and hold over that time period. The backtest confirms what has been pointed out already. During times of an upward market trend, the strategy will result in some strong gains. But those gains are quickly shredded when the market is range-bound, with many losing trades.

There ARE simple MA systems that will beat buy and hold on the S&P. But this isn't one of them.
 
Quote from Corso482:

Tell me what's wrong with my logic--

Let's say we agree to buy SPY whenever it crosses above it's 50 day MA, hold it, and only sell when it crosses back below.

If it is in fact true that over the next 50 years, the market will go way up, then it's true that the market will spend the vast majority of those up periods above its 50 day MA. Therefore, if we agree to buy and hold whenever it's above it's MA, then we'll be along for the ride for the vast majority of the bull market.

If, however, the predicition is wrong, and over the next 50 years there's a major decline, then the market will spend the vast majority of that decline below its 50 day MA; therefore, because we do not hold the market when its below its 50 day MA, we'll preserve our capital in periods of decline.

In conclusion, buying and holding SPY/QQQ in the manner described above will allow you to ride bull trends in the coming days and avoid any declines.

Therefore, this simple strategy is better than buy and hold because it allows you all the benefits of buy and hold without the risk.

Where am I wrong?
More...


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Corso student;
Actually there is a valid principal there with SPY, QQQ;
study it with longer moving averages even if it takes you 4 or more years to find it.:cool:

Wisdom is the principal thing.
Solomon, trader king
 
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