engleski

The Effectiveness of the 50/200 Dual Exponential Moving Average Crossover on the S&P 500

The subject of this paper is the evaluation of a simple mechanical trading system – a dual exponential moving average crossover on the S&P 500 index, with a shorter moving average of 50 days and a longer of 200 days (EMA 50/200). Although the system beats the S&P from 1990 to 2012, the buy-and-hold strategy has the upper hand in the longer time frame - from 1950 onwards. Still, given that most investors find it very difficult to maintain strict investment discipline for longer periods of time, the system and the S&P are tested on shorter sub-periods of ten years. Once the available data is divided into sub-periods, buy-and-hold emerged as the proper choice during a secular bull market, while the EMA 50/200 system was the superior option during a secular range-bound market. If we realistically assume that the average investor will find it nearly impossible to successfully time the beginning and ending of these markets, then buy-and-hold remains the best choice for investors with a very long-term investment horizon (longer than a few decades) – e.g. pension funds and young employees at the beginning of their careers. The EMA 50/200 system, on the other hand, is a more suitable option for investors who are past a certain age when they are not, financially and emotionally, willing to endure high volatility that comes with an all equity portfolio. The analyzed mechanical system allows them to enjoy the benefits of stock market exposure (capital appreciation and dividends) far longer than conventional asset allocation would suggest.

capital market; S&P 500; trading system testing

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