Stock market indices are popular with traders because they have a long bias: stock markets tend to rise over time.
Historically, one of the best stock market trading strategies was the “golden cross” trading strategy.. This simple, easy-to-implement strategy has outperformed buy and hold in the US stock market over the past 50 years, challenging the common assumption that it is impossible to time the stock market.
Read on to learn this powerful trading strategy which can help you profit from the superior performance of the US stock market as well as other stock and commodity markets.
The “golden cross”, also known as the “bull cross”, is the 50th day moving average it crosses from below the 200-day moving average above it. It is a moving average crossover trading strategy. Moving averages are usually calculated using cross prices from each day in the period.
The crossover gets its “gold” and “bull” names from the fact that it was considered a reliable and profitable long-term buy signal. Below I will provide historical data that confirms that this has been the case in the US stock market.
Some analysts prefer to use exponential moving averages (EMA), where recent prices are given more weight instead of simple moving averages, or at least use the EMA for the 50-day moving average. I prefer to use simple moving averages because there is no need to give more weight to current prices, but it still makes little difference.
In stocks and other speculative assets such as commodities, the golden cross is a commonly used signal to indicate the start of a bull market – a period of sustainable growth in the value of publicly listed shares.
Knowing when a bull market in stocks starts can be a great advantage for traders who can buy stocks now and hold them for as long as the bull market lasts.
The end of a bull market can be predicted by the opposite signalwhen the 50-day moving average crosses the 200-day moving average. This is known as the “cross of death” or “bear cross” and can be used as exit strategy for long positions.
Gold Cross and Death Cross in S&P 500 2020-2022
The price chart above in the S&P 500 index shows the 50-day SMA in gold and the 200-day SMA in blue with arrows highlighting the golden cross made on the 8th.Thursday July 2020 and the death cross or bear made on 11Thursday March 2022. During this period, the market grew by 33.38%.
The Golden Cross has been particularly effective in the US stock market. I will explore below its record when used as a signaling instrument in the main US stock market index, the S&P 500 indexover the past 50 years.
Golden crosses have occurred 22 times in the S&P 500 over the past 50 years (since 1973). If you used each of these as a buy signal and exited when there was a bearish crossover as a moving average crossover strategy – here are the results you would see We can also define a bull market as the 50-day SMA being above the 200-day SMA, so the data also shows full details of the 21 bull markets since 1973, in addition to the one that has been running since early 1973.
Bull markets in the S&P 500 since 1973
Following this investing or trading strategy, the S&P 500 Index would produce very positive results:
- These 21 trades would result in a loss only 7 times. This gives a very good win rate of 66.66% trades.
- The average trade lasted just under 2 years and produced an average return of 20.80%, annualized 13.09%which is a substantially higher annual return than the index as a whole has produced since 1973.
- The losing trades created by this moving average crossover strategy were on average much smaller than the winning trades: -5.10% compared to a much larger average win of 33.60%. The return distribution chart below shows a strong shift in leptokurtosis (toward positive returns):
Return Distribution S&P 500 Golden Cross Strategy 1973-2023
- When the 50-day moving average is above the 200-day moving average, 53.74% of the trading days saw an increase in price with an average daily increase of 0.04%. Over the entire period since 1973, we see worse results of 52.68% and 0.03%.
- Results do not include dividends or trading coststhe last of which is minimal.
Although a simple buy-and-hold strategy since 1973 would have produced a higher annualized return over 50 years than a golden cross/cross moving average strategy on the S&P 500, the risk-adjusted return is higher using the golden cross. This is because it gives you a higher return for the time you spend in the market.
Using this moving average crossover strategy to generate buy and sell signals in the US stock market has had excellent results over the past half century.
This strategy may not be used as a long-term investment strategy. You can simply look for long trades in individual stocks only when the 50-day SMA is above the 200-day SMA. Any long-term stock trading strategy will see better returns with this filter.
The strategy can also be used with other stock indexes and individual stocksand more liquid commodities.
What does the golden cross mean in stocks?
A golden cross in a stock or stock index means that the 50-day simple moving average has crossed the 200-day moving average. Traditionally, this marks the start of a new bull market, when prices are expected to rise for a while.
Which stocks are at the golden cross?
Promotions at the Golden Cross will change from day to day. On the day of publication, the S&P 500 index was close to making a golden cross.
What is the gold cross trading strategy?
In the gold cross trading strategy, you enter a long trade when the 50-day moving average crosses below the 200-day moving average. A variety of exit strategies can be used and typically the opposite signal when the 50 day moving average crosses top to bottom the 200 day moving average, which is known as a death cross, is used to exit.
How do you read the golden cross in stocks?
You read the Golden Cross in a stock by placing the 50-day moving average and 200-day moving average on the daily price chart and waiting for 50 to cross above 200 from the bottom, which will signal a trade entry.
