In Part I we saw how a simple tactical strategy that can be implemented by ETfs out-performs an actively managed mutual fund even after transaction costs. However, there are more than a million ways to implement an SMA strategy. Everything from picking the lookback period, cross-overs and enveloping are all open questions. There is no single “best” way to do it. Here, we add a simple check that makes sure that the SMA is trending higher before going long.
Quite simply, for an N-day SMA, we compare Nth-day to N/2th-day. If it is higher, then we go long.
NIFTY MIDCAP 100
NIFTY SMLCAP 100
The gross returns are lower than the “raw” strategy that we saw in Part I. However, the drawdowns for the 10-day SMA are a lot shallower. Shallower drawdowns allow a bit of leverage to be employed. This could be a good starting point for a NIFTY futures trading strategy.
In Part III, we look at how cross-over strategies perform.
Code and charts are on github.