Comparison of the performance of buying SPY above the 200SMA to buy and hold strategy
The 200-day moving average is a widely followed technical indicator that is often used by traders and investors to identify trends in the market. The 200-day moving average is calculated by taking the average closing price of an asset over the past 200 days. When the price of an asset is above its 200-day moving average, it is considered to be in an uptrend, and when it is below its 200-day moving average, it is considered to be in a downtrend.
The strategy of buying above the 200SMA and selling below it is based on the idea that when the price of an asset is above its 200-day moving average, it is more likely to continue to rise, and when it is below its 200-day moving average, it is more likely to continue to fall. The goal of this strategy is to capture gains from uptrends and avoid losses from downtrends.
To test this strategy, I backtested the performance of buying $SPY when it is above its 200-day moving average and selling when it crosses below the 200-day moving average over the past 28 years. The results of this backtest are as follows:
Above 200SMA Net Profit: +398.37%
Buy & Hold Net Profit: +692.64%
Above 200SMA Win %: 38%
Above 200SMA Lose %: 62%
Above 200SMA Max Drawdown: -22.82%
Buy & Hold Max Drawdown: -57.40% (2008 Crisis)
Above 200SMA Average Win: +7.64%
Above 200SMA Average Loss: -1.76%
Above 200SMA Risk/Reward: 1:4.3
The above results show that the strategy of buying above the 200SMA and selling below it has produced a return of +398.37%, which is significantly lower than the buy and hold strategy, which returned +692.64%. This is to be expected as the strategy is designed to capture gains from uptrends and avoid losses from downtrends, which means that it will miss out on some of the gains during long-term uptrends.
The strategy of buying above the 200SMA had a 38% win rate, with an average win of +7.64%. The 62% of losing positions had an average loss of -1.76%. The risk to reward ratio is 1:4.35, meaning that for every dollar at risk, the strategy has returned $4.35. This is a good risk to reward ratio and suggests that the strategy is profitable in the long run.
The maximum drawdown for the strategy of buying above the 200SMA was -22.82%, which is significantly lower than the maximum drawdown of -57.40% for the buy and hold strategy during the 2008 financial crisis. This suggests that the strategy of buying above the 200SMA and selling below it is able to reduce the risk of large losses during market downturns.
It's important to note that this strategy was backtested on historical data and the results may not be indicative of the future performance of the strategy. Backtesting a strategy on historical data can be useful for evaluating the potential performance of a strategy, but it is not a guarantee of future performance. Also, it's important to remember that this strategy may not be suitable for all investors.
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