Golden Cross Trading Strategy (Backtest Analysis)

Golden Cross Trading Strategy is famous and a cited phenomenon in the media. In this article, we look at the performance of the Golden Cross in the S&P 500.

A Golden Cross involves two moving averages – one short and one long. We use the 50 and 200-day moving averages.

A Golden Cross happens when the short moving average crosses above the long moving average. As a trading signal, it works reasonably well. It keeps you invested in bullish markets and keeps you out of trouble when we get a bear market. You will also find a Golden Cross Trading Strategy Glossary if you want to learn more about this indicator.

Let’s start by explaining in more detail what the Golden Cross in trading is:

What is the Golden Cross Trading Strategy?

A Golden Cross involves two moving averages – one short and one long. When the short-term moving average crosses above the long-term moving average, we have a Golden Cross.

We like to use the 50-day and the 200-day averages. Thus, when the 50-day moving average breaks above the 200-day moving average a Golden Cross is formed.

For some reason, this breakout attracts a lot of media attention and a lot of speculation about a potential bull market. Is this for a good reason? You’ll find out after our backtests further below.

Why should the Golden Cross Trading Strategy work?

The stock market tends to be in a long-term uptrend due to inflation and productivity gains, and the Golden Cross Trading Strategy aims to exploit this upward bias while reducing losses in bear markets.

In fact, the Golden Cross can help you stay out of a significant bear market, and while the strategy is prone to whipsaw signals, the few big winners can make up for it.

So, how do you use the Golden Cross indicator?

Golden Cross and time frame

When backtesting the Golden Cross Trading Strategy, which time frame are we looking at? In this article, we use daily bars. But you can, of course, use any time frame you want. There is no right or wrong in trading as long as it works.

What are the trading rules for the Golden Cross Trading Strategy?

Trading Rules

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Let’s take a look at a trade example:

Golden Cross Trading Strategy example

Let’s show you how a Golden Cross looks on a chart:

In this example, the 50-day moving average broke above the 200-day moving average, signaling a bullish breakout. You could have bought the S&P 500 in July 2020 at 2867 and ridden the trend until you sold in March 2022 at 4173, for a nice 32.4% gain. Of course, not all trades turn out this well!

But how does the Golden Cross strategy perform over the long term?

Golden Cross Trading Strategy backtest – does it work?

We backtested the strategy on the S&P 500 since 1960. We used the same trading rules as described above.

This is the complete trade list since 1960:

The strategy primarily involves minimal activity, resulting in a small number of trades- only 32. Each trade lasts approximately 350 days, slightly less than 1.5 years.

Let’s look at the equity curve:

You started with 100 000 and ended up with 5.6 million 60 years later. Please remember that this backtest doesn’t include reinvested dividends; thus, the result would have been significantly better with dividends reinvested. However, it serves to measure the result relatively against S&P 500.

Backtest Results and statistics

Let’s look at the backtest results, trading statistics, and metrics:

• 32 trades since 1960
• CAGR: 6.6% (buy and hold is 6.9%) – not including dividends
• Average gain per trade is 15.4%
• 78% of the trades are winners
• You are invested 69% of the time
• Max drawdown is 33% (buy and hold 56%)
• Risk-adjusted return is 9.5% (6.6% divided by 0.69)

We found that 78% of the trades were winners, with an average trade gain of 15.4% and an annual return of 6.6%. This, we might argue the success rate is pretty high, although what matters is the total return.

While this doesn’t beat buy-and-hold’s annual return of 6.9%, we must consider that our strategy was only invested 69% of the time.

Golden Cross’ results are impressive if we factor in the risk-adjusted return at 9.5%, which we calculate by dividing the annual return of 6.6% by the time spent in the market (0.69).

The Golden Cross strategy has substantially lower drawdowns than buy-and-hold, with only a 33% drawdown versus buy-and-hold’s 56%.

Golden Cross video

Click here.

Conclusions:

So, there you have it, a powerful trading strategy that can help reduce your losses in bear markets and ride the bull markets.

The Golden Cross works well because it lowers the time spent in the market and, thus, drawdowns. The Golden Cross in trading is all about playing defense.

List of trading strategies

We have written over 1200 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.

The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation. The code we made for backtesting in this article is part of the list.

The strategies are taken from our landing page of profitable trading systems.

The strategies also come with logic in plain English (plain English is for Python trading and backtesting).

For a list of the strategies we have made, please click on the green banner:

These strategies must not be misunderstood for the premium strategies that we charge a fee for:

How does the Golden Cross help in reducing losses in bear markets?

The strategy aims to exploit the long-term uptrend in the stock market by staying invested during bullish periods and providing signals to exit during bearish markets, thereby reducing losses. The Golden Cross is considered significant because it works as a trading signal, keeping investors invested in bullish markets and helping them avoid trouble during bear markets.

Golden Cross Trading Strategy Glossary (Terms and Definitions)

1. Golden Cross: A bullish technical indicator that occurs when a short-term moving average crosses above a long-term moving average, signaling potential upward momentum.
2. Moving Average: A smoothed representation of price data over a specified period used to identify trends and reduce noise in price fluctuations.
3. Short-Term Moving Average: A moving average calculated over a relatively short period, such as 10 or 20 days.
4. Long-Term Moving Average: A moving average calculated over a longer period, such as 50 or 200 days.
5. Crossover: The point at which two moving averages intersect, which is crucial in the Golden Cross strategy.
6. Death Cross: The opposite of a Golden Cross, where a short-term moving average crosses below a long-term moving average, signaling potential downward momentum.
7. Signal Line: A reference line often used in conjunction with a moving average crossover strategy to confirm trading signals.
8. Exponential Moving Average (EMA): A type of moving average that gives more weight to recent price data, making it responsive to recent price changes.
9. Simple Moving Average (SMA): A basic moving average that gives equal weight to all data points in the calculation.
10. Trend Analysis: The process of examining historical price data to identify and confirm trends.
11. Price Action: The movement and behavior of an asset’s price over time.
12. Volatility: A measure of the degree of variation in an asset’s price over time.
13. Support Level: A price level at which an asset tends to find buying interest and resist falling below.
14. Resistance Level: A price level at which an asset tends to find selling interest and resist rising above.
15. Bull Market: A market characterized by rising prices and optimism among traders.
16. Bear Market: A market characterized by falling prices and pessimism among traders.
17. Confirmation: Additional signals or indicators that support a trading decision.
18. Entry Point: The specific price at which a trader initiates a trade.
19. Exit Point: The specific price at which a trader closes a position.
20. Stop Loss: An order placed to limit potential losses by selling or exiting a trade if the price moves against the trader.
21. Take Profit: An order placed to lock in profits by selling or exiting a trade when a certain profit target is reached.
22. Risk-Reward Ratio: The relationship between the potential profit and potential loss in a trade.
23. Backtesting: Evaluating a trading strategy using historical data to assess its potential effectiveness.
24. Moving Average Convergence Divergence (MACD): An indicator that measures the difference between two moving averages and provides insight into trend momentum.
25. Oscillator: A technical indicator that fluctuates above and below a centerline to indicate overbought or oversold conditions.
26. Overbought: A condition where an asset’s price is considered to be too high and may be due for a correction.
27. Oversold: A condition where an asset’s price is considered to be too low and may be due for a rebound.
28. RSI (Relative Strength Index): A momentum oscillator that measures the speed and change of price movements, often used to identify overbought or oversold conditions.
29. Volume: The number of shares or contracts traded in a security or market during a given period.
30. Breakout: A significant price movement that surpasses a predefined support or resistance level.
31. Pullback: A temporary reversal or decline in price within an existing trend.
32. Position Sizing: Determining the number of shares or contracts to trade based on risk tolerance and portfolio size.
33. Backwardation: A market condition where futures prices are lower than the expected future spot prices.
34. Contango: A market condition where futures prices are higher than the expected future spot prices.
35. Liquidity: The ease with which an asset can be bought or sold without significantly affecting its price.
36. Whipsaw: A situation where a trader is caught in a series of rapid and unexpected price reversals.
37. Lagging Indicator: An indicator that provides signals after a trend has already started.
38. Leading Indicator: An indicator that provides signals in advance of a price trend.
39. Risk Management: Strategies and techniques to protect capital and minimize losses in trading.
40. Profit Target: A predetermined level at which a trader aims to take profits on a trade.