Trading Moving Average Crossovers: Further Testing of Risk-Adjusted and After-Tax Returns

Abstract

Many investors require equity-like returns, but lack the risk tolerance to endure extreme losses. Trading moving average crossovers (MACs) is one strategy that may aid equity market investors in avoiding long protracted downturns. This article provides further analysis of MAC strategies. The findings suggest that trading MACs has remained a simple and effective risk-reduction strategy over the last 20 years. Investors who cannot tolerate extreme losses are signaled out of the market before a significant drawdown. However, the nature of the “bull” market volatility in recent years has significantly reduced the benefits associated with the strategy. In addition, while trading MACs does incur increased negative tax effects over that of a buy-and-hold strategy, the impact appears to be minimal.

TOPICS: Portfolio construction, technical analysis, risk management, performance measurement