Cycle Trading

[Duma]

As many of you know, I have a bad habit of spending a lot of time reading and researching things looking for that one little gem that could change my thinking. So this weekend I saw a small Kindle book that entitled "5 Moving Average Signals That Beat Buy and Hold". Since it was cheap and I knew of the author, I thought I would buy it.

Sure enough he presented 5 methods, most of which I was well aware of that beat the market from 1/3/2000 to 12/9/2016. As one might expect it was a come on to get you to buy into his Moving Average 101 eCourse, so I was not surprised that his conclusion was worthless when actually there was a great find.

As I read about each of the 5 methods I wrote down the numbers and I very suspicious of the data since his B&H numbers were different for each method. So clearly the eBook was thrown together very quickly.

So of the 5 methods, four I had looked at many times before but his 5th one was one I had never considered. And then because the resulting 17 year data was way better than the other methods, I suspected that the data was wrong. So this morning I created my own data for Method 5. It was correct and I drew some very interesting conclusions.

Here are the methods and data presented in the eBook, presented in order of gain. All are based on daily charts and trades are determined by criteria at EOD except for Method 5 that is determined EOM (end of month).

 
  
 Buy & Hold   125.2% gain  -55.2% max drawdown 
  
 Method 1  	127%	-19%		50/100 sma xo (cross over) 
 Method 2 	 193%	-17%		20/200 sma xo	 
 Method 3 	 128%	-23%		250 sma xo EOD	 
 Method 4 	 205%	-19%		Golden Cross 50/200 sma xo	 
 Method 5 	 318%	-17%		200 sma xo EOM	

So you can see why I was suspicious of Method 5 data. My data for Method 5 shows the gain to be 300% vs B&H of 114%. Clearly this method has huge advantages over the other methods.

As I was creating my data, I was constantly struck by how many times there were closes during the month on the opposite side of the 200sma, but by ME the prices had recovered back to the current position, be it either long or cash. In total there 17 cases when I was long and 9 when I was in cash, for a total of 26 times. Without even looking at the actual trades for all the other methods, I can just imagine the extreme numbers of trades and how many would have resulted in whips that would deduct from the gains. Surprisingly over a 17 year period, this method only had 2 smaller whips out of 14 trades.

I don't have any immediate plans to use Method 5 because I have other charts that I am using, but I will not forget how successful this Method was. I will also be paying attention to how many times dips or surges during a month recover to the current trend of the month. Another insight to the market learned.