06 March 2011

Returns from Golden and Death Cross

As per previous post lets check out how "golden cross" would have performed on Nifty in last 20 years.

As you can see, the strategy to "long" Nifty on golden cross and getting out of Nifty and being in cash on death cross has underperformed buy and hold strategy.

But what if we tweak this idea so that we benefit in the downtrend as well. So the plan would be to "long" Nifty on golden cross and "short" Nifty on death cross.

Well, this has certainly not worked either! This strategy has actually been even worse.

So, why did this happen? We were expecting that following golden and death cross would be a wiser decision than just hopping in and out of nifty around 200dma. And we also added an aspect of shorting the Nifty to get returns in downtrend.

The easiest thing to point out would be the fact that crossovers are slow to happen. Nifty made its "Top" in November at 6340 and had a fast fall to 5180. The death cross is happening in March at 5530. 4 months and 800 points later. A sign that its slowness can do some damage for returns based on it, though this crossover signals a mature trend, but thats a different issue.

Strategy 1 here fails when compared to buy and hold because the wait to get "Long" when an uptrend starts and the wait to get out when downtrend starts is far too much. It eats away substantial profits. Also, at times, and I will say generally the reversals are swift and most of the gains can come quite early.

Strategy 2 fails and fails more so because of the double whammy of the reason stated above.

To wind up, I would say that it all depends on how agile your trading strategy is and what is your time frame. People would have had great returns from ordinary strategy and poor returns from "proven" strategies.


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