In our blog, we will analyze different kind of technical market indicators on a regular basis.
The 200 Day Moving Average is a very simple and well known technical market indicator. It helps to determine the overall health of a stock since a stock that is trading above its 200 Day Moving Average is being considerate to be in a long term uptrend and the other way round.
In this issue, we would like to show some basic back testing for the 200 day simple moving average, which we have down for all three major U.S indices (S&P 500, Nasdaq and the Dow Jones Industrial Average) as well as for all stocks within the Dow Jones Industrial Average on a daily basis.
All used data is split and dividend adjusted. In addition, we have taken 1 day slippage into account but we have excluded taxes and trading expenses. The analyzing period was from April 2002 until May 2012.
The result of this back test shows you the cumulative returns of each underlying for a buy and hold strategy as well as the cumulative return of the specific underlying if its price was trading above and below its 200 day moving average. In addition, the table below shows the amount of total trades (long and short) which would have occurred by following the 200 day simple moving averages investment strategy as well as the maximum drawdown for each scenario.
In total, only 36.4 percent of all observations, a long-/short strategy would have had outperformed a buy and hold strategy while the maximum drawdown was lower in 81.8 percent of all cases, if the price of the specific underlying was trading above its 200 day simple moving average.
On average, an investor would have made 90 trades during 2002 and 2012 by following the 200 day simple moving average strategy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.