Strategy Lab: 5-day EMA cross of 10-day EMA

This is another strategy which can be set up using Zignals stock alerts. It's a variation of a moving average strategy published back in May; this time a shorter time frame and more responsive exponential moving average is used to generate trade signals. A 5-day EMA crossover of a 10-day EMA was used to generate trades; buying upside crosses and selling on a downward cross of the slower EMA by the faster one.


Test period: A complete bull-bear cycle defined by the S&P (March 20th 2000 to October 8th 2007).

I tested on two groups of stocks:

US stocks (Active Trader): AAPL BA C CAT CSCO DIS GM HPQ IBM INTC IP JPM KO MSFT SBUX T WMT

European ADRs: ALU BHP BP SAP DT ASML STM BCS UN TOT ELN AZN DEO RYAAY LUX

Invested: $5,000 per trade

Commission: $9.95

Trades: Round-trip only; partial trades were excluded.

As in previous strategy labs, commission costs impacted heavily on net return. For the test period there was a total loss of -$21,683 from 1,385 trades where no stop was used. The most effective stop strategy was 5%, although it only slightly improved the return to a loss of -$15,753.

In the absence of commission there was a significant improvement in the returns.

The European ADRs got a significant bump from Elan Corp (ELN) and SAP (SAP), but returns from European ADRs dropped sharply once a stop was factored in. The most consistent return for US and European stocks grouped together was achieved using a 3% or 4% stop.


Unlike the slower moving average strategy, this exponential moving average strategy was profitable across the majority of stop settings, running second to the MACD strategy with respect to total profit.

How about the performance over three randomly selected test years?

The selected dates covered July 2006/07 (bullish), May 2000/01 (bearish) and May 2005/06 (bullish). There was a slight advantage to using a 4% stop, but the 3-6% stop range generated greater benefits than using no stop at all or using a greater stop.


The real benefits to using a stop were in the details. During the strong bull market of 2006/07 the no stop, 7% and 8% stops produced the highest profit; returning over $10,000 in profit on 171 trades compared to $9,855 with a 4% stop. The bull market of 2005/06 also produced a similar pattern of profits, but on a much reduced scale. However, during the 2000/01 bear market the no stop, 7% and 8% stop strategy posted losses of -$16,295, -$16,663 and -$13,830 respectively compared to only -$3,537 of losses with a 4% stop on 190 trades.

This is a strategy well suited to use with a protective stop. Although one should caution on overconfidence generated from using loose stops (or no stop at all) during rich times.

Feel free to use these stocks in your own Zignals stocklist.

Unfortunately we didn't make the cut for this week's festival of stocks hosted by Circle of Competence.

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts, and stock charts website