A Simple Yet Powerful Strategy: The 10-Month Moving Average Rule
Tests show that this Strategy Turns $100 into $5 Million with Controlled Risk
Hi all! For anyone trading or investing in financial markets, this could be one of the most beneficial articles to date. Imagine turning a $100,000 investment into over $5 million while keeping drawdowns under control. This strategy, backed by research and billionaire trader Paul Tudor Jones, is so simple it's easy to dismiss. But remember, complexity is not always the answer
The 200-Day Moving Average Rule
The approach in today's video is based on the largest 500 companies in the US, ensuring neither liquidity nor scalability are concerns. The strategy is proven by backtests using the 200-day moving average rule. The rule is simple: buy the S&P 500 Index when the price crosses above the 200-day moving average and sell when it crosses below. Despite its simplicity, the results are undeniable.
Avoiding Major Market Crashes
From 1960 through to 2020, the equity curve shows a steady increase while avoiding major market crashes like the 2008 financial crisis. During such downturns, the strategy would have exited the market, avoiding significant losses. This mechanical trend-following system limits risk and removes emotion from decision-making.
Improving the Strategy: The 10-Month Moving Average Rule
Replacing the 200-day rule with the 10-month moving average rule further improves the strategy. Exit the index and remain in cash when the price closes below the 10-month moving average, and re-enter when it closes back above. This method eliminates declines from events like the dot-com bubble and the 2008 crash.
Comparing Both Strategies
When comparing the 200-day and 10-month strategies, both reach similar endpoints, but the 10-month rule shows a more consistent trajectory. Analyzing data back to the 1900s, $100 invested with the 10-month timing approach would have turned into over $5 million, compared to just over $2 million with a buy-and-hold strategy. The key difference is reduced volatility and avoiding major declines.
The Benefit of Timing Approaches
During the worst years for the S&P 500, like 1931 and 2008, the 10-month timing approach significantly outperformed, minimizing losses. For example, during the 2008 financial crisis, the buy-and-hold strategy lost over 36%, while the timing model made a positive return.
Applying the Strategy to Recent Events
Looking at the pandemic, the 10-month rule marked an exit just before the March 2020 decline and a re-entry as the market recovered, avoiding most volatility. The same pattern held through 2022, demonstrating the strategy's effectiveness even in volatile markets.
Extending Beyond the S&P 500
The strategy also works with other stocks and funds. For example, Cathie Wood's ARK Innovation Fund and Jeff Bezos's Amazon both showed significant gains when applying the 10-month moving average rule. This approach captures most of the gains in an uptrend and exits before major declines
The Long-Term Perspective
Since the 1900s, the S&P 500 has shown a positive bias, with more years of gains than losses. Adding the 10-month moving average rule enhances this positive bias, providing better returns and limiting drawdowns.
Conclusion
The beauty of this strategy lies in its simplicity. It's a mechanical system that removes emotion, reduces drawdowns, and applies to a diversified index. As a standalone approach, it has shown remarkable consistency for over a century and can serve as a foundation for any investment strategy.
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