Strategy lab: Buy cross of 200-day MA by 50-day MA - Sell 15% gain

Following the success of last week's strategy developed around a stock alert which bought a 2% gap, I looked at this week's stock alert: buy cross of 200-day MA by 50-day MA and tested a trading strategy for it.


Within Zignals, the stock alert historical test looks like this:


The historical testing showed a steady return over time with an average gain of 8% over 90 trading days, and an average maximum gain of 15% for US stocks. The win percentage was well into the 60% range, another bonus:


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.

The test bought the closing price of the day of the moving average crossover and sold at the closing price of the day a 15% gain was registered - in real terms this could generate considerable slippage.

The performance of this strategy showed considerable contrast to the 2% gap buy. The base strategy with a $9.95 commission was not profitable irrespective of the stop strategy employed. Unlike prior strategy labs where commission based trading was not profitable because of the large number trades generated (in some cases up to 1,000 trades over 7 years for 17 stocks), the 50-day MA cross of the 200-day MA generated a lowly 93 trades for the 17 stocks over 7 years. This was well below the 300+ trades of the 2% gap buy which was profitable when a commission was included. So the strategy looks to have a core weakness based on the use of a 3-8% protective stop loss, something the Zignals historical test does not account for (it looks for a straight return without the use of a stop).

The 'best' return was a -$2,052 loss using a 3% stop with a 34% win percentage. The worst return was -$6,133 with a 7% stop on a 26% win percentage.

In the absence of a commission there was no vast improvement in the return. The European ADRs did better using a loser stop, whereas the US stocks performed better with a tighter stop.


How did the strategy perform over three random test years?

The three randomised 1-year periods were March 2002/03 (bearish), October 2007/present day (bearish!!), December 2005/06 (neutral-bullish).

Not surprisingly, the October 2007 to the present day showed the worst losses; the tighter the stop the lower the loss. However, the low number of trades (7 for the 17 stocks) for this period would have kept most people out of the market. The same was true for the 2002/03 bear market. Even the neutral 2005/06 market recorded only 19 trades for 17 stocks. In the latter case the 3% stop strategy recorded a $1,328 profit on a 53% win percentage. The average performance is given below:


The strategy required more breathing room than an 8% stop allowed given the disparity in the Zignals historical test and strategy lab results. Because a 50-day MA / 200-day MA crossover tends to heavily lag a bullish reversal it is perhaps not the best entry strategy for a short term gain (such as a looking for a fixed point or percentage gain) where the probability of a pullback - and a stop hit - is high.

Got a favourite stock alert strategy? We would love to hear from you. Contributions welcome (email: contributions@zignals.com).

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