In Part II of SMA Strategies, we saw how we could reduce drawdowns by making sure that we go long only when the slope of the SMA is positive. i.e., when the SMA is trending higher. Here, we will look at cross-overs.
While previous strategies compared the current value of the index vs. its SMA, a cross-over strategy uses a smaller look-back SMA instead of the index. Essentially, go long if SMA(N/4) > SMA(N).
NIFTY 50 Cumulative Returns
Cross-over with slope check
The stand-alone slope check from Part II has lower peak drawdowns than the cross-over versions. The additional averaging of recent prices leads to a lagged response. Given the proclivity of our markets to cliff dive, a lagged response will result in higher drawdowns. It could, however, lead to lower transaction costs by papering over short-term mean-reverting moves.
Code and additional charts are on github.