Using the 5-10-20 Strategy to Trade the S&P 500 and Nasdaq 100

As promised, I’m following up on this week’s 5-10-20 Trend-Following Strategy to look at how it has performed on both the S&P 500 and Nasdaq 100.

S&P 500

In a nutshell, applying the strategy directly to the S&P 500 hasn’t worked very well. What worked a bit better (but still not as good as traditional longer-term 50/200-day moving average crossovers) is using the Nasdaq Composite to generate the signal, but placing the actual trades on the S&P 500.

To illustrate, see graph below of the S&P 500 (blue), this modified 5-10-20 Strategy (red), and a 50/200-day crossover strategy (green) from 1972:

click to enlarge

[logarithmically-scaled]

And for the number-lovers:

click to enlarge

Both strategies reduced downside volatility and improved risk-adjusted returns, but the 50/200-day strategy clearly performed better historically.

I am considering adding the 5-10-20 strategy to the State of the Market report only because it has improved the predictiveness of the 50/200-day crossover strategy a bit (meaning, the market has performed better when both are signaling a long than when just the 50/200-day is). Will ponder this a bit more.

Nasdaq 100

The strategy has worked about as well on the Nasdaq 100 as on the broader Nasdaq Composite. Results have been slightly better using the modified approach discussed above, generating the signal using the Composite and then applying it to the 100, but the difference hasn’t been significant.

This is my last post (for now) on the 5-10-20 trading strategy. I hope readers have gotten a useful nugget out of all of this. I have it on the to-do list to put more of the indicators discussed on the dk Report to the test because many of them are in the same vein as what I do here at the MarketSci Blog. As always, there's more to follow.

Comments

[John Lounsbury:]

Thanks for the thorough follow through on this subject.

2008 Dec 05 08:43 AM

[Jack Reacher:]

Finally, the last graph below shows that the 5-10-20 strategy (red) has been much more effective than the classic 50/200-day EMA crossover approach (blue) on this particular index.

Jun 16 04:30 PM