Summary of Best Trading Indicator To Build A Strategy Upon (100 Year Back Test!)

The video discusses a trading strategy based on the 10-month moving average, which has shown significant historical success in mitigating risks and enhancing returns in the stock market, particularly when applied to the S&P 500 Index. The strategy is rooted in research conducted by Meb Faber in 2013 and is favored by billionaire trader Paul Tudor Jones.

Main Financial Strategies:

200-Day Moving Average Rule:
- Buy the S&P 500 Index when the price crosses above the 200-day moving average.
- Sell when the price crosses back below the moving average.
- This strategy has demonstrated a linear equity curve from 1960 to 2020, effectively avoiding major market crashes.
10-Month Moving Average Rule:
- Buy the S&P 500 Index when the price is above the 10-month moving average and sell when it falls below.
- This approach has historically resulted in better performance compared to the buy-and-hold strategy, yielding over $5 million from a $100 investment since 1900, compared to just over $2 million with a buy-and-hold approach.
- The strategy reduces volatility (11.97% vs. 17.87% for buy-and-hold) and helps avoid major declines during market downturns.

Methodology:

Backtesting: The strategies were tested over a century of market data, confirming their effectiveness in various market conditions.
Comparison of Strategies: The video compares the performance of both the 200-day and 10-month moving average strategies, with a preference for the more consistent results of the 10-month rule.
Application Beyond S&P 500: The methodology can be applied to other stocks and funds, as illustrated by examples from Kathy Wood's ARK Innovation fund and Jeff Bezos's Amazon.

Key Findings:

The 10-Month Moving Average Rule significantly mitigates emotional stress associated with market volatility.
Historical data supports the effectiveness of the 10-month strategy in avoiding substantial losses during major market crashes.
The strategy can serve as a foundational approach for traders and investors, complementing other methods.

Presenters/Sources:

Meb Faber (researcher)
Paul Tudor Jones (trader)

Notable Quotes

— 01:24 — « Its simplicity falls into the category of if it was that simple then everybody would be doing it, which is precisely why many dismiss the idea. »

— 02:36 — « It's essentially a mechanical trend following system which limits risk and removes emotion from decision making. »

— 04:17 — « The key however is not the endpoint value but the journey getting there. »

— 06:06 — « Although it could be used as a standalone strategy, it could be used as a foundation for all your strategies in the stock market. »

— 09:42 — « The beauty of this strategy is manifold; it's a mechanical system that removes emotion, reduces drawdown significantly, and is used on a diversified index covering 500 of the largest companies in the US. »