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The One Rule That Cut My Backtest Drawdown by 4×
I have tested a lot of clever entry signals. Almost none of them mattered as much as one boring rule about a moving average — and it is the rule I actually trade with real money today.
The rule is embarrassingly simple: hold the asset while its price is above its 200-day moving average; when price closes below that line, move to cash. No indicators stacked five deep, no prediction. Just one question asked once a day — is price above the 200-day average, yes or no.
I did not expect much from it. I expected the fancy mean-reversion and breakout signals I had spent weeks on to win. They did not. When I ran the trend filter out-of-sample on QQQ and SPY — data the rule had never seen during design — here is what happened.
The numbers that changed my mind
Two figures did it:
- Worst drawdown fell from about −26% (buy and hold) to about −7% with the filter. Roughly a 4× reduction in the deepest hole I had to sit through.
- Risk-adjusted return (Sharpe) roughly doubled, from around 0.9 for buy-and-hold to about 1.4 with the filter — out-of-sample, not curve-fit.
The filter did not beat buy-and-hold on raw total return in a straight bull run — nothing that sits in cash part of the time will. What it did was change the shape of the ride: it kept me out of the worst part of every major decline. The average return was similar; the pain was a quarter of it.
That is the whole trade-off. You give up some upside in exchange for never riding a position from the top all the way to the bottom. For most people — and for anyone using leverage — that is a very good deal.
Why the drawdown number is the one that matters
Return gets the headlines; drawdown decides whether you are still in the game. A −26% drawdown on spot is uncomfortable but survivable. The same −26% move with 3× leverage is roughly a −78% account hit — and if your liquidation price sits inside that range, you do not get the recovery at all, because the position is already closed.
This is where the boring moving-average rule stops being boring. Leverage multiplies drawdown, and drawdown is what liquidates you. A filter that turns a −26% drawdown into −7% is the difference between a leveraged position that survives a correction and one that gets force-closed at the worst possible price. You can see exactly how close that line is for any position with the liquidation price calculator and the max-safe-leverage calculator.
What it looks like right now
As I write this, QQQ's 200-day average sits near $643, and price is comfortably above it around $710. So the rule says one word: hold. That is the same answer it has given for months, which is exactly the point — the filter is quiet most of the time and only speaks when a real trend break happens. It is not trying to be clever. It is trying to keep you on the right side of the one line that has historically marked the difference between a correction and a bear market.
I run this live on a leveraged QQQ position, and the discipline is entirely mechanical: while price is above the line, I do nothing. The day it closes below, the position comes off. No opinion, no news, no "this time is different." That removes the single most expensive thing in trading — my own judgement in a drawdown.
How to use it without getting wrecked
Three things make or break this rule in practice:
- Size by risk, not by margin. The filter reduces drawdown, but leverage can put it right back. Decide your position size from the distance to your stop, not from the maximum the exchange offers — the position-size calculator does the math.
- Keep leverage low enough that the filter's −7% drawdown never touches liquidation. At modest leverage a 7% adverse move is a scare; at 25× it is a funeral. Check the gap with the liquidation-buffer calculator.
- Respect the exit. The whole edge is in actually going to cash when the line breaks. Skip that once and you inherit the full −26% drawdown the rule was built to avoid.
The takeaway
I spent far more time on signals that did not survive contact with out-of-sample data than on the one rule that did. The lesson I keep relearning: the goal is not to predict the top, it is to not be there when the floor gives way. A single moving average did that better than everything clever I tried — and it does it with leverage too, as long as you size the position so a normal drawdown can never reach your liquidation price.
Run your own numbers before you copy anyone: max safe leverage for a given drawdown, liquidation price, and position size. New to any of these terms? Start with the free trading academy.
Educational only — not financial advice. Backtest results are from my own out-of-sample testing on QQQ/SPY daily data and are not a promise of future results. Leverage can lose your entire deposit.