5 Moving Average Signals That Beat Buy and Hold Backtested Stock Market

Five Moving Average Signals That Beat
Buy and Hold

Backtested Stock Market Signals
By Steve Burns & Holly Burns
Contents
Forward
Can You Beat Buy and Hold?
Why Buy and Hold Investing Works Long-term
The Emotional Factor
The Different Time Periods
Moving Average Signal #1: The most popular moving average
Moving Average Signal #2: Avoid noise
Moving Average Signal #3: The gold and death crosses
Moving Average Signal #4: A popular crossover system
Moving Average Signal #5: Basic trend following
Conclusion
About the Data in This Book
Want to Learn More About Moving Averages?
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Disclaimer
This book is meant to be informational and shouldn’t be used as trading or
investing advice. All readers should gather information from multiple
sources to create their personalized investment strategies and trading
systems. The authors make no guarantees related to the claims contained
herein. Always seek the advice of a competent licensed professional before
implementing any plan or system that involves your money. Please invest
and trade responsibly.
Forward
“There are only two things you can really do when a new bear market
begins: sell and get out or go short. When you get out, you should stay out
until the bear market is over.” - William J. O’Neil
This book was written for traders and investors that are frustrated with their
stock market returns, and for readers who were fans of buy and hold until
they witnessed (or felt) the crash of 1987, the NASDAQ bubble of 2000, or
the 2008-2009 financial meltdown. It’s also for traders interested in the
basics of trend following and quantified trading signals. This book won’t
tell you how to make easy money or get rich quick. It presents an
alternative to buy and hold investing, including examples of potential entry
and exit signals based on the current price action rather than market timing.
Market timing fails because it tries to be predictive about an unpredictable
future.
This book will demonstrate systematic ways to know when to be in, and
when to go to cash before the next bear market, crash, or financial panic.
The goal is to be in during bull markets and out before bear markets. The
systems described within are on the same time frame as buy and hold
investors, and are meant to be compared to buy and hold for long-term
returns and maximum drawdowns, not against other investing or trading
systems.
All trading systems have specific goals for returns and drawdowns in
capital. The goal of this book is to beat buy and hold investing in returns
and drawdowns with less emotional pain and financial stress.
The systems described in this book are long side only because the short
side is difficult to trade with a passive approach. To sell short in this way is
to fight against the long-term trend of the entire market. The easiest money
is on the long side of the stock indexes. We have omitted the short side
because it is rarely worth the risk.
This book introduces the concept of reactive signal based technical analysis
used by trend following traders, but it is only one way to make money,
there are many others. I hope this book will give you something to think
about when you are deciding how to invest your money, and if you do
decide to try these strategies for yourself, that it will show you how trend
following traders get on the right side of a long-term trend and stay there
for as long as possible.
“In financial economics, the efficient-market hypothesis (EMH) states that

asset prices fully reflect all available information. A direct implication is
that it is impossible to "beat the market" consistently on a risk-adjusted
basis since market prices should only react to new information or changes
in discount rates (the latter may be predictable or unpredictable).” -
Wikipedia
In many academic and investment circles, it is assumed that the markets

can’t be beaten by investors or traders for a long period. It is accepted that
all investment methodologies and trading systems revert to even at some
point. It is common practice for many investors to buy a basket of
diversified stocks and hold them, forever. But who does this philosophy
benefit? Mutual fund companies, personal finance planners, and Wall
Street.
If it isn’t impossible to beat buy and hold, then how do we explain the
traders and investors featured in Jack Schwager’s “Market Wizard” series
and Michael Covel’s “Trend Followers”? Or the long-term success of
investors like Warren Buffet or George Soros? Were they all just lucky, or
did they apply an edge to investing and trading? Just because some people
can’t beat the market consistently doesn’t mean no one can. Just because
99.9% of the population can’t play professional sports doesn’t mean it’s
impossible. The managed mutual fund industry is the bastion of buy and
hold investing, but it the best strategy?
Per the New York Times, of the 2862 U.S. stock mutual funds that existed
in March 2009, not one has beaten the market. They weren’t positioned
correctly to benefit from the rebound after the financial panic of 2008. How
many mutual funds routinely beat the market year after year? Zero.
When you buy a managed mutual fund, the odds are that the manager will
not be the next Peter Lynch, but instead someone who will charge you a
management fee for underperforming their benchmark index. Mutual fund
management fees will decrease your investment capital over the long-term,
chipping away at your money little by little and year after year. You could
lose 1% to 2% of your capital to fees each year and limit your ability to
grow your capital. Mutual fund managers have a good business model that
serves them well. You, as the investor, take all the risk while they get paid
set fees regardless of their performance. Mutual fund managers collect big
fees for the expectation of doing one thing: beating their benchmark.
Managers of mutual funds that invest in big cap stocks should, at a
minimum, beat the S&P 500 index exchange traded fund SPY to justify
their fees. If they can’t do that, what’s their purpose? Over the long-term,
80% of mutual funds don’t beat their benchmarks. The truth is that the SPY
ETF beats 80% of active managed mutual funds, most of the time.
The SPY ETF beats 80% of mutual fund managers for five primary
reasons:
-The SPY ETF has a small management fee of .09%.
-Its holdings follow the S&P 500 index rule-based system. It is managed in
a mechanical way, linked to the actual S&P 500 index and not based on an
individual manager’s prediction.
-It can’t underperform the market index because it is the market index.
-It’s diversified across all market sectors.
Mutual funds have a built-in disadvantage because of their overhead.

Clients pay for things like management, administrative fees, and brokerage
expenses, which can range from 0.2% for an index mutual fund up to 2%
for some managed funds.
The 80% of mutual fund managers that don’t beat the S&P 500 still get
paid, and they get paid before the investors regardless of how well they
perform. If they manage a $100 million mutual fund and their pay is 1% of
the fund, they could make $1 million a year. If their administrative fee is
2% of assets under management, then they must beat the S&P 500 by 2%
just to break even. One reason that many mutual fund managers can’t beat
their index is that they must beat the index by the amount of their
administrative fees, essentially starting in the hole.
Few professional mutual fund managers can beat the market because they
try to predict the future instead of reacting to what’s happening. They
generally rely on their own opinions instead of following the price trends.
Their incentive is to keep their job safe, not outperform their benchmark,
so they usually play a defensive game. These managers will often take the
safe path of investing in popular stocks and sectors.
Investors and traders that have historically beaten the market over long
periods of time take a different approach from typical money managers.
Mutual fund managers are almost always fully invested in stocks except for
the cash they must hold for redemptions. They may rotate through sectors,
but they can’t go to cash during pullbacks, recessions, and bear markets.
They can capture the upside of the market, but they can’t protect their
investors from the downside. In an upward trend, this can be a fun ride. It’s
not fun when the trend ends and you lose money while the mutual fund
manager still gets a payday.
The first step to beating buy and hold is to move from actively managed
mutual funds to passive index mutual funds that have small management
fees, or to index Exchange Traded Funds (ETF) like SPY. SPY is a ticker
symbol like any other stock. By making this one change, and switching
from active to passive investing, you increase your annual returns by 2%
and let your money compound long-term.
Outperformance of an index happens because a stock investor or trader

understands that asset prices incompletely reflect the fears and hopes of the
majority. It’s possible to "beat the market" over a long period by using
quantified signals that create an edge through good risk/reward ratios.
Market prices do react to new information or changes in the economy, but
the key is to react to the trend in price and ignore predictions or opinions.
The market goes through cycles of trends, extremes in prices, and it also
reverts to the mean. If you can limit your downside risk and maximize the
upside profits, it’s possible to beat the market over the long-term.
A price filter that gets a trader or investor out before the market is down
10%, 20%, or 50% will help avoid painful corrections, bear markets, and
crashes. Obviously, getting out after these things have happened is what
causes underperformance and loss of capital. Likewise, investors that get
out near a market top or at the beginning of a downtrend but don’t know
when to get back in, frequently miss the uptrend or next bull market. The
solution is a simple signal that gets you out early enough to avoid big
losses and gets you back in fast enough to capture large gains. One such
solution is a moving average price tracking system to keep you on the right
side of the market.
Summary:
-Mutual fund managers provide almost no protection from downside
market risk.
-Mutual fund managers don’t outperform their benchmark indexes over
long periods of time, largely due to their own overhead.
-The first step in beating buy and hold investing is to not buy and hold
actively managed mutual funds.
-You could increase your returns by as much as 2% a year by moving to
low fee index funds or ETFs.
-The simplest way to buy into an index is to purchase an index tracking
ETF or buy an index mutual fund.
-SPY is the ticker for the S&P 500 exchange traded fund.
“[The S&P 500 index] is the most historically reliable single metric of the
US market over the past 140 years for both price and dividends. The early
Dow 12 was too small and volatile to be a proxy for the broader US market,
and the Dow of the past few decades also lacks sufficient diversification to
be the best single gauge of the US equities market.” – Doug Short
The stock market tends to go up over time, and it does eventually break old,
all-time highs and move higher. This is driven by new companies and the
growth of leading companies as the world economy grows. Most the profits
in the stock market are made by the leadings stocks during bull markets.
The long-term gains in the stock market are created by companies that go
from an IPO to a Dow Jones Industrial component.
During bull markets, capital flows into equities and pushes prices up, but
the stock market doesn’t always go up in the short term. There may be
corrections of 10%, times when prices pull back 20% in bear markets, and
crashes of 50% and more during financial panics. These short-term
downtrends happen even in stock indexes. Buy and hold doesn’t work for
most individual stocks because all companies don’t trend up over time.
Only those that increase their market share, keep up with technology, and
maintain an edge over their competitors will win the day.
Only the best companies that grow their earnings consistently can be
bought and held as an investment, and this makes a buy and hold strategy
difficult for mutual funds because the fund managers must pick the
winners. They essentially must know the unknowable. As we’ve seen in the
past, seemingly sound companies have gone bankrupt and their stocks have
gone to zero. This is even true for companies with household names like
Circuit City, Radio Shack, Lehman Brothers, and General Motors.
Buy and hold investing is a system of betting on the long-term trend of

publicly traded stocks being up over a long period. Conversely, the S&P
500 is weighted by market cap and stocks enter and leave the index based
on their size. Companies that do well and grow in market capitalization
enter the S&P 500, and the companies that struggle eventually fall out of
the index. The most successful companies in the world that are in a price
uptrend get the most weighting in the S&P 500, and the weighting drops for
the less successful companies that have seen downtrends. The S&P 500
index has a survivor bias built-in, because it’s designed to let winners run
and drop losers out of its holdings. This makes it an effective trend
following system.
Unlike mutual fund managers who may be driven by their own personal
gain, the S&P 500 index is managed by a committee as a rule based system.
The committee that selects the companies of the index are largely free from
the pressure of quarterly returns and performance, so they can choose in a
more academic, rule-based way.
Indexes are adaptive and designed to reflect the American economy. They
are also diversified across different sectors. “When considering the
eligibility of a new addition to the S&P 500 index, the committee assesses
the company's merit using eight primary criteria: market capitalization,
liquidity, domicile, public float, sector classification, financial viability,
length of time publicly traded and listing exchange. The committee selects
the companies in the S&P 500 so they are representative of the industries in
the United States economy.
To be added to the index, a company must satisfy these liquidity-based size

requirements:
-Market capitalization is greater than or equal to US$5.3 billion
-Annual dollar value traded to float-adjusted market capitalization is
greater than 1.0
-Minimum monthly trading volume of 250,000 shares in each of the six
months leading up to the evaluation date.” – Wikipedia
I have chosen the S&P 500 index for the systems in this book rather than
randomly chosen stocks, because stocks come and go but the S&P 500
index lives on with the companies that do survive. The S&P 500 index
can’t go bankrupt, issue false earnings, or be displaced by technology
because it is diversified across all sectors and has big cap stocks; the ones
that dominate their own industries.
Summary:
-The S&P 500 index is a system.
-The S&P 500 index is made up of the companies that dominate their own
industries.
-The S&P 500 changes and evolves over time to represent current market
leaders; it is dynamic and not stagnant.
-Indexes tend to trend higher over the long-term, while individual stocks
can be winners or losers.
-Indexes can’t go bankrupt thanks to diversification of companies and
sectors.
-The S&P 500 is a good way to bet on the future of the U.S. economy inside
a long-term mechanical trend following system.
-The S&P 500 is a safe, active investment vehicle to replace your current
big cap stock buy and hold market exposure.
One of the major challenges when it comes to beating the market doesn’t
have anything to do with a company’s earnings or stability, but a trader’s
own psychological and emotional well-being. Life can become stressful
very quickly when people are investing real money in real-time. It’s easy to
say that you are a buy and hold investor, in it for the long haul when things
are going well, and something entirely different to watch your money
evaporate when things take a downturn.
On paper a 10% correction sounds harmless. But the reality is that losing
10% of a $250,000 401k retirement account means that you just lost
$25,000. That is real, hard-earned money and the loss will be painful. One
losing month isn’t the end of the world, but when the next month’s
statement shows another 10% drop, bringing the account to $200,000---
that’s when bad decisions are made.
For most investors, $50,000 in two months is too much to lose, so they
move their stock investments to cash the next morning. Finally, the pain
and fear of loss subsides, what a relief. Unfortunately, that was the full,
downside move and the market rallies back. The next month the market is
back up 10%, but the investor misses and stays in cash, fearful that it’s a
fake move. The investor decides to wait to get back in when it pulls back to
where they got out. The next following month the market is back up to even
from the 20% plunge and the investor missed the move. Frustrated, they
end up going back in the market at the short-term price resistance, and lose
money on the next retracement because it’s a range-bound year for prices.
Sadly, this story is common. Most investors lose money when they start
making decisions based on their emotions rather than relying on a system
they can trust. Exiting your investments when you are afraid and entering
them again when you are greedy will put you on the fast track to
unhappiness. The easiest way to make money is to hold stocks in bull
market uptrends. The easiest way to lose money is to hold stocks through
bear markets. While the stock market in general does tend to bounce back
eventually, the same is not necessarily true for individual stocks.
An index is a much better choice for passive investors. Indexes are

systematic and rule based in their selection of components. They pick the
strongest leading stocks, they diversify across all industries, they let
winners run and cut losers short, their holdings are liquid, and you can get
exposure without individual transaction costs.
Summary:
-Don’t discount how important your emotions are when trading. The best
way to avoid making bad decisions is to keep yourself out of bad positions,
especially ones that you have no control over.
-Indexes are something to consider because they are systematic and rule
based, removing the emotional factor that can lead to bad decisions.
-Even though markets generally rebound at some point, individual stocks
may not.
“The markets are the same now as they were five to ten years ago because
they keep changing – just like they did then.” – Ed Seykota
You can’t determine a trading system’s effectiveness by backtesting over a

long period and making a quick assessment of its success. During a market
peak in price, it can appear that buy and hold is the most valid approach
because the market tends to come back when looking at it from the
perspective of a current all-time high in price. However, during a market
price bottom it will appear much less favorable.
In 2008-2009, it was possible to lose over a decade’s worth of gains as a

buy and hold investor, while trend followers locked in their profits before
the crash. A moving average system will give you the opportunity to
participate in bull markets and then exit with profits before bear markets.
However, it’s important to understand that your backtesting time frame can
cloud your judgement on a system’s effectiveness, depending on the current
state of the market.
You need to ask yourself the following questions:

-How did a moving average system perform during different market
environments?
-How did they perform during a flat period for stocks?
-How did they perform at the market bottom?
-How did they perform at the market top?
-Did the moving average system get you out before a big market drop?
-Does the system get you back in quickly when a market starts a new
uptrend in price?
-Does the market keep you in stocks during bull markets so you receive the
same gains that the buy and hold investors receive?
The purpose of these systems is to give entry signals that get you into
uptrends and out before strong downtrends. They should create asymmetric
risk/reward ratios where the false signals create small losses in a short
period, while the signals that capture trends keep you in long-term uptrends
for large gains. A moving average system should create profitability in the
time frame you are trading in. A moving average system should avoid the
noise of price action and only giving signals with the best potential for
capturing a trend. These are the goals of a simple trend trading system.
While backtesting is a good tool to see how price action patterns have acted
in the past, it’s not predictive of the future; think of it as a rearview mirror
rather than a windshield.
Summary:
-There are different types of market environments: uptrends, downtrends,
and range-bound markets.
-Moving averages should be used for the time frame you are trading in.
-Moving average systems perform differently in different type of markets.
-A moving average system should signal an entry at the beginning of a
potential uptrend.
-A moving average system should signal an exit at the beginning of a
potential downtrend.
-A moving average system should create big wins and small losses.
-The moving average system should be above the ordinary price action so
you don’t over trade.
-We want valid signals and not random noise.
-Moving average systems are reactive and not predictive.
-The past is not a prediction of the future.
-We must follow our system and let the market price action decide the
result.
Moving Average Signal #1: The most popular moving
average
“I teach an undergrad class at the University of Virginia, and I tell my

students, “I’m going to save you from going to business school. Here,
you’re getting a $100k class, and I’m going to give it to you in two
thoughts, okay? You don’t need to go to business school; you’ve only got to
remember two things. The first is, you always want to be with whatever the
predominant trend is. My metric for everything I look at is the 200-day
moving average of closing prices. I’ve seen too many things go to zero,
stocks and commodities. The whole trick in investing is: “How do I keep
from losing everything?” If you use the 200-day moving average rule, then
you get out. You play defense, and you get out.” – Paul Tudor Jones
*These price action backtests from www.ETFReplay.com are used by

permission and are shown ONLY as examples. These backtests are
unlikely to match perfectly with other platforms due to variables
involved in entries, exits, and how each platform manages price data.
All backtests on ETFreplay.com assume that trades are executed on the
close, never the open.
*These were my settings for this backtest and are subject to the
variables that this platform uses compared to other testing software.
Dividends are included in the backtests.
You will enter this system the first time that price crosses back up over the
200-day SMA. The following backtests are based on the first cross. The
backtest will wait until ETF crosses above the moving average before
making the first buy. This system waits for a better risk/reward ratio to
enter at a break back over the 200-day SMA. For this system, you must
wait for an initial monthly crossover and close over the 200-day SMA
rather than entering and taking a position on the first day of trading,
because the results will be skewed with an initial bad risk/reward entry at
elevated levels.
This system’s signals are taken at month end rather than on the day of the
actual cross. This is a slow, long-term system that looks to enter or exit at
the end of the last day of the month, based on whether price has crossed
over or under the 200-day SMA. This system has a maximum potential of
twelve signals in one year.
This was the 200-day simple moving average used:

-Moving Average is based on the total return data series that includes
dividends and distributions.
-The simple moving average is the average (arithmetic mean) of the
specified number of data points.
-The 200-day moving average is the average of 200 daily total return values
Because the first system is taking a signal only once per month rather than
daily, it means accepting more risk. However, studying this system will
help you decide if you would rather take on more risk, or be subjected to
more frequent false signals, as with the other systems in this book.
Let’s look at how this moving average system would do if traded during the
21st century of bull markets, bear markets, sideways markets, and crashes:
-From January 3, 2000 to December 9, 2016: $SPY buy and hold had a gain
of 125.2% with a maximum drawdown of -55.2% during the same period
for a 200-day SMA end of month system.
-$SPY using the 200-day SMA as an end of month sell/buy indicator from
January 3, 2000 to December 9, 2016: The 200-day SMA end of month
system returned 317.7% and had a maximum drawdown of 17.3%. This
system almost tripled returns and cut the drawdown by over two-thirds.
How did this moving average system do during a decade long sideways
market?
-From March 24, 2000 to December 30, 2011: $SPY buy and hold had a
gain of 7% with a maximum drawdown of -55.2% during the same period
for a 200-day SMA end of month system.
-$SPY using the 200-day SMA as an end of month sell/buy indicator from
March 24, 2000 to December 30, 2011: The 200-day SMA end of month
system returned 112.6% and had maximum drawdown of 17.3%.
How would this moving average system do if traded from the stock market
peak to the stock market bottom?
Chart Courtesy of StockCharts.com
-From October 11, 2007 to March 9, 2009: $SPY buy and hold had a loss of
-52.8% with a maximum drawdown of -55.2% during the same period for a
200-day SMA system.
-For $SPY using the 200-day SMA as an end of month sell/buy indicator
from October 11, 2007 to March 9, 2009: The 200-day SMA system lost
-1.1% and had a maximum drawdown of
-4.6%, avoiding big losses and cutting the drawdown by over 90%.
This is a very simple trend trading system that even casual investors can
use because you only need to worry about it on the last day of the month,
with signals primarily being taken at the beginning of a bull market and the
beginning of a potential bear market. This system generally keeps you on
the right side of the long-term trend; long during bull markets and in cash
during downtrends.
This system will filter out the false signals on end of day and end of week
as it is on a longer time frame. This system looks for the long-term uptrend
of the stock market and to avoid the bear market cycles until price trend
has reversed.
Using this system, your signals will be taken on the last day of the month.
If price crosses over the 200-day SMA inside the month and closes over it
on the last day of the month, you will enter and go long. If the price crosses
under the 200-day SMA inside the month and then closes under the 200-day
SMA, you will go to cash. You will do this twelve times a year.
You will enter this system on the first day that price crosses back up over
the 250-day SMA at the end of that trading day. The following backtests are
based on the first cross. The backtest will wait until the ETF crosses above
the moving average before making the first buy. This system waits for a
better risk/reward ratio to enter at a break back over the 250-day SMA. You
should wait to enter or the results will be skewed with an initial bad
risk/reward entry at elevated levels. In most cases, the daily price crossover
will likely be a pullback in the market and price will already be above the
250-day SMA, except during corrections and bear markets.
This system’s signals are taken at the end of the day, the same day of the
cross. This is the daily chart time frame, and a long-term system that looks
to enter or exit at the end of the day based on whether price is over or under
the 250-day SMA. It only gives a signal at that cross, and the system may
go weeks or months without a signal. You will be in cash when price is
below the 250-day and long when price is above the 250-day SMA. This
system will keep you long through bull markets, will likely take you to
cash as a market starts to go into a correction, and will help you avoid the
worst of bear markets and crashes.
This was the 250-day simple moving average used:

-This 250-day moving average of prices is based on the total return data
series that includes dividends and distributions.
-The 250-day moving average is the average of 250 daily total return values
This system means accepting more risk of giving back capital gains during
a bull market by waiting until the 250-day SMA is crossed instead of just
the 200-day SMA. However, this second option helps to avoid the noise of
false moves through the 200-day moving average in a bull market.
This system gets you out faster than the month end system and helps you
avoid sharp monthly moves. It will also get you back in quicker if the
market rallies strong on the daily chart versus a monthly system. Unlike the
first system, this one requires you to be more active, watching to see if
price is close to the 250-day moving average for several days in row.
The main drawback of this second system is that the signals can move back
and forth and you can lose money when price is near the 250-day SMA and
the price range is volatile and causes false signals.
How would this system do if traded during the 21st century of bull markets,
bear markets, sideways markets, and crashes?
of 127.4% with a maximum drawdown of -55.2% during the same period as
the signals for a 250-day SMA end of day system.
-$SPY using the 250-day SMA as an end of day sell/buy indicator from
January 3, 2000 to December 9, 2016: The 250-day SMA end of day system
returned 128% and had maximum drawdown of 23.1%. This system can
duplicate the returns of buy and hold with less than half the drawdown.
market?
gain of 10.3% with a maximum drawdown of -55.2% during the same
period as the signals for a 250-day SMA end of day system.
March 24, 2000 to December 30, 2011: The 250-day SMA end of day
system returned 31.8% and had a maximum drawdown of 23.1%. This
system tripled buy and hold returns and cut drawdowns in half, but it needs
a long-term uptrend to make good returns.
-From October 11, 2007 to March 9, 2009: $SPY buy and hold had a loss of
-52.7% with a maximum drawdown of -55.2%.
October 11, 2007 to March 9, 2009: The 250-day SMA system lost -3.8%
with a maximum drawdown of -5.3%. This system cut the drawdown by
almost 90%.
You will enter this system on the first day that the 50-day SMA crosses
back over the 200-day SMA. The following backtests are based on the first
cross. The backtest will wait until the ETF crosses above the moving
average before making the first buy. This system waits for a better trend
signal to enter after a 50-day/200-day SMA crossover. This is not a system
to enter immediately as the results will be skewed with an initial bad
risk/reward entry at elevated levels if the moving averages have already
crossed.
This system’s signals are taken at the end of the day on the day of moving
average crossover. This is the daily chart time frame and it is a long-term
system. It only looks to enter or exit at the end of the day based on whether
the 50-day SMA is over or under the 200-day SMA. It only gives a signal at
this crossover, and this system may go weeks or months with no entry or
exit signals. You will be in cash when the 50-day SMA is below the 200-
day SMA and long when the 50-day SMA is above the 200-day SMA.
This is a moving average crossover system which means that you are
trading one moving average crossing another moving average instead of
price crossing a moving average. This system will keep you long through
strong bull markets, will likely take you to cash as a market starts to trend
downward, and will help you avoid large pullbacks, bear markets, and
crashes.
This is the moving average crossover system that was used:

-50-day simple moving average and the 200-day simple moving average.
This 50-day and 200-day moving averages of prices is based on the total
return data series that includes dividends and distributions.
-The 50-day moving average is the average of 50 daily total return values.
-The 200-day moving average is the average of 200 daily total return
values.
This system only takes a signal when the 50-day SMA moves through the
200-day SMA on the daily time frame. This system attempts to balance the
risk of giving back capital gains during a bull market, and staying long
when an uptrend is confirmed. However, this third option helps with faster
signals than waiting for price to move back to the 200-day or 250-day
SMAs.
This system usually gets you out slower than the 250-day SMA or the 200-
day end of month system and helps you avoid any false downward moves.
This system will also get you back in slower to avoid a lot of false moves
due to volatility if the market rallies strong on the daily chart. The 50-day
and 200-day SMA are you signal lines, and you will find this to be a less
active system with fewer signals.
How would this moving average system do if traded during the 21st century
of bull markets, bear markets, sideways markets, and crashes?
of +167.1% with a maximum drawdown of -55.2% during the same period
as the first signal generated for the 50-day/200-day SMA end of day system
test.
-$SPY using the 50-day SMA crossover of the 200-day SMA as an end of
day buy signal, and the 50-day SMA crossing under the 200-day SMA as an
end of day sell signal to go to cash from
January 3, 2000 to December 9, 2016: The 50-day/200-day SMA crossover
end of day system returned +204.9% and had maximum drawdown of
-19.2%.
market?
gain of 34.3% with a maximum drawdown of -55.2% during the same
period as the signals for a 50-day SMA/200-day SMA end of day system.
-$SPY using the 50-day SMA/ 200-day SMA crossover system as an end of
day sell/buy indicator from March 24, 2000 to December 30, 2011: The 50-
day SMA/200-day SMA end of day system returned 90.8% and had a
maximum drawdown of 17.3%. This system beat buy and hold returns and
decreased drawdown by two-thirds.
From October 11, 2007 to March 9, 2009: $SPY buy and hold had a loss of
-52.7% with a maximum drawdown of -55.2%.
-From October 11, 2007 to March 9, 2009 there was no new crossover
signal to enter long during this entire cycle. The system signaled to stay in
cash if you weren’t already long from a previous entry signal. If you were
in $SPY before this time frame, it would have signaled you to go to cash by
January of 2008 to avoid the crash after the 50-day crossed under the 200-
day.
Moving Average Signal #4: A popular crossover
system
average before making the first buy. This system waits for a trend signal to
enter after a 20-day/200-day SMA crossover. This is not a system to enter
immediately because the results will be skewed with an initial bad
crossed.
This system’s signals are taken at the end of the day on the day of the
moving average crossover. This is a daily chart time frame and it’s a long-
term system. It only looks to enter or exit at the end of the day based on
whether the 20-day SMA is over or under the 200-day SMA. It only gives a
signal at this crossover, and you can wait weeks or months for a signal. You
will be in cash when the 20-day SMA is below the 200-day SMA and long
when the 20-day SMA is above the 200-day SMA.
strong bull markets, will most likely take you to cash at the first sign a
market starts to trend downward, and help you avoid pullbacks, bear
markets, and crashes.

-This system uses the 20-day simple moving average and the 200-day
moving average. The 20-day and 200-day moving averages of prices is
based on the total return data series, which includes dividends and
distributions.

values.
This system takes a signal only when the 20-day SMA moves through the
risk of giving back capital gains during a fast pullback in a bull market,
with staying long when an uptrend is quickly confirmed. This system has
faster signals than the previous three moving average systems.
This system gets you back in very quickly if the market rallies strong on
the daily chart. And it could get you long closer to the bottom of bear
markets depending on the speed of an early rally. The 20-day/200-day
crossover system delays your entry from when price crosses over the 200-
day or 250-day SMA and helps avoid false signals and volatility.
You must watch this system more closely than the other systems to see if a
20-day/ 200-day moving average cross is about to happen. This could be a
less choppy than the first two systems, and you’ll get faster signals than the
last example.
How would this moving average system do if traded during the 21st century
of bull markets, bear markets, sideways markets, and crashes?
test.
day buy signal, and the 20-day SMA crossing under the 200-day SMA as a
sell signal to go to cash from January 3, 2000 to December 9, 2016: The 20-
day/200-day SMA crossover end of day system returned +193% and had
maximum drawdown of -17.3%.
market?
gain of +31.5% with a maximum drawdown of -55.2% during the same
period as the signals for a 20-day SMA/200-day SMA end of day system.
day SMA/200-day SMA end of day system returned +67.9% and had a
maximum drawdown of -17.3%. This system doubled buy and hold returns
and decreased drawdown by two-thirds.
How would this moving average system do if you traded it from the stock
market peak to the stock market bottom?
-From October 11, 2007 to March 9, 2009 there was no new crossover
signal to enter long during this entire cycle. The system stayed in cash if
you were not already long from a previous entry signal. If you were in
$SPY before this time frame, it would have signaled you to go to cash by
December of 2008 and avoid the crash after the 20-day crossed under the
200-day.
Here are the variables that this platform uses to help understand any
variance against other backtesting sites or software. These were my
settings. Dividends are included in the backtests.
average before making the first buy. This system waits for a better trend
signal to enter after a 50-day/100-day SMA crossover. This is not a system
to enter immediately, because the results will be skewed with an initial bad
crossed.
This system’s signals are taken at the end of the day on the day of the
moving average crossover. This is the daily chart time frame, and it is a
long-term system that only looks to enter or exit at the end of the day based
on whether the 50-day SMA is over or under the 100-day SMA. It only
gives a signal at this crossover, and this system can go weeks or months
with no entry or exit signals. You will be in cash when the 50-day SMA is
below the 100-day SMA and long when the 50-day SMA is above the 100-
day SMA.
strong bull markets, will most likely take you to cash as a market starts to
trend downward, and help you avoid large pullbacks, bear markets, and
crashes.

-This system uses the 50-day simple moving average and the 100-day
moving average.
-The 50-day and 100-day moving averages of price is based on the total
return data series that includes dividends and distributions.
values.
This system takes a signal only when the 50-day SMA moves through the
risk of giving back capital gains during a bull market with staying long
when an uptrend is confirmed. This option improves performance by
reducing the time frame of the long-term moving average signal.
This system generally gets you out faster than the 50-day/ 200-day cross,
250-day SMA, or the 200-day end of month system. It will also get you
back in quicker if the market rallies strong on the daily chart versus the 50-
day/ 200-day crossover, 250-day, or a monthly system. This can be a more
active system to use because you must watch for the 50-day/ 100-day
moving average cross.
How would this moving average system do if you traded it during the 21st
century of bull markets, bear markets, sideways markets, and crashes?
test.
day buy signal, and the 50-day SMA crossing under the 100-day SMA as a
sell signal to go to cash from January 3, 2000 to December 9, 2016: The 50-
day/100-day SMA crossover end of day system returned +127.2% and had
market?
gain of +2.5% with a maximum drawdown of -55.2% during the same
period as the initial signal for a 50-day SMA/100-day SMA end of day
system.
day SMA/100-day SMA end of day system returned +54.1% and had a
maximum drawdown of -19.4%. This system beat buy and hold returns
during the time of its signals and decreased drawdown by over half during
the flat market.
How would this moving average system do if you traded it from the stock
market peak to the stock market bottom?
-From October 11, 2007 to March 9, 2009: during the same period of this
signal entry and exit, $SPY buy and hold had a loss of -53.7% with a
-$SPY using the 50-day SMA crossing over the 100-day SMA as an end of
day buy indicator, and a 50-day SMA crossing back under the 100-day
SMA as an end of day sell signal from October 11, 2007 to March 9, 2009:
The 50/100-day SMA crossover system lost -12.9% and had maximum
drawdown of -16.7%.
Conclusion
These moving average systems are not meant to be the Holy Grail of
investing. These systems are basic examples of the principles of trend
following systems that are on a time frame similar to buy and hold, and
require few actions until the signal for entry or exit is near. This permits a
trend trader to have a quantified system to enter at the beginning of a
potential trend, let a winning trade go as far as possible, and exit to lock in
profits before a bear market, correction, or market crash.
These systems use the principles of asymmetric risk/reward by using

moving averages on a time frame that keeps you fully invested for as long
as possible during strong bull markets, rallies, and uptrends so you can
stockpile profits. They take you back to cash at the first sign of danger so
your losses are minimalized.
The systems in this book could lead to losses if the market is volatile. You
could be stopped out and be forced to re-enter several times. An overbought
market means that you could wait for months before a pullback and a
crossover entry is given. Patience and discipline are the keys to making
these systems work for you.
A backtest is not predictive and it is not perfect. It is a historical sample of

how price action behaved in the past. We can’t predict the future, so it’s
important to employ proper risk management, a valid trading system, and
the discipline to choose and follow a methodology that fits our personality.
Remember that backtests are just one of the tools in your toolbox.
Summary:
-They are on long enough time frames to avoid getting excessive entry and
exit signals. Short time frames will deliver too many signals and impair
your ability to capitalize on trends.
-The moving averages in this book give you enough room to capture the
long-term uptrend but are generally fast enough to get you out before
things take a turn for the worse.
-If an exit signal is false and the market rallies, these moving average
systems are fast enough on a time frame that will get you back in quickly
so you can catch upward trends.
-These systems get you in on the first cross signal so you enter only with a
good risk/reward at the first entry signal.
-These systems will only work if they are followed with discipline over the
long-term. You can adjust them, but the new parameters must to be
backtested for validity through multiple market environments.
-The moving average systems in this book have been tested over a 16-year
period, capturing the beginning and end of bull markets, through bear
markets, and market crashes. They are a good sample of how they perform
during different market environments.
-Backtests are not predictions of the future or guarantees of future
performance. The odds are that patterns repeat themselves, because
people’s emotional reactions repeat over time to create trends.
Remember:
We choose our system, position size, and markets to trade, the market will
choose our returns.
Happy Trading!
Follow Steve at NewTraderU.com or on Twitter at @sjosephburns.
About the Data in This Book
A special thank you to ETFReplay.com and Stockcharts.com for the use of

their data and charts included in this book. They are invaluable resources
and we are appreciative of their willingness to help all of us become better
investors and traders.
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Table of Contents
Moving Average Signal #1: The most popular moving average
Moving Average Signal #4: A popular crossover system
Conclusion

5 Moving Average Signals That Beat Buy and Hold Backtested Stock Market

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5 Moving Average Signals That Beat Buy and Hold Backtested Stock Market

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Five Moving Average Signals That Beat

Buy and Hold

“In financial economics, the efficient-market hypothesis (EMH) states that

In many academic and investment circles, it is assumed that the markets

Mutual funds have a built-in disadvantage because of their overhead.

Outperformance of an index happens because a stock investor or trader

Buy and hold investing is a system of betting on the long-term trend of

To be added to the index, a company must satisfy these liquidity-based size

An index is a much better choice for passive investors. Indexes are

You can’t determine a trading system’s effectiveness by backtesting over a

In 2008-2009, it was possible to lose over a decade’s worth of gains as a

You need to ask yourself the following questions:

“I teach an undergrad class at the University of Virginia, and I tell my

*These price action backtests from www.ETFReplay.com are used by

This was the 200-day simple moving average used:

Chart Courtesy of StockCharts.com

This was the 250-day simple moving average used:

Chart Courtesy of StockCharts.com

This is the moving average crossover system that was used:

Chart Courtesy of StockCharts.com

This is the moving average crossover system that was used:

-The simple moving average is the average (arithmetic mean) of the

Chart Courtesy of StockCharts.com

This is the moving average crossover system that was used:

Chart Courtesy of StockCharts.com

These systems use the principles of asymmetric risk/reward by using

A backtest is not predictive and it is not perfect. It is a historical sample of

A special thank you to ETFReplay.com and Stockcharts.com for the use of

In the Moving Averages 101 eCourse, you’ll get:

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Listen to many of our titles on Audio!

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