Long DV2 with a Rising 50 Day Moving Average
In continuing with our series on holding period analysis for DV2, we will look at trading in the direction of the trend on a shorter time frame. In this case we will be looking at oversold entries (DV2<20) relative to the 50dma instead of the 200dma to see if the same conclusions hold true. In the last decade, markets have become increasingly volatile and as a result moving averages have become less reliable, so for this test we’re going to use a rising 50 day moving average instead of the close being over the 50dma to define the trend.
While the returns from long trades within a falling 50dma environment are slightly higher for shorter holding periods, you can clearly see that trades with a rising 50dma are much higher for longer holding periods. There is also a clear progression in profitability as the holding period increases for the rising 50dma group.
Looking at our risk metric, the DVR, we can see that for all but the shortest of holding periods the rising trend environment beats the falling trend for long trades. It is also very clear that the risk/reward increases for increasing holding periods when you aligned with the trend while when you trade against it there is a clear deterioration.
Looking back at some of the results from the earlier blog post involving the test within the context of a longer timeframe, we see clear outperformance in the longer time frame from both a return and risk standpoint across the spectrum of holding periods. Once again we find that it pays to trade in the direction of the longer term trend for long positions. But will the same hold true for shorts using the 50dma?