The Golden Cross stock trading strategy is an example of a simple long term trend following system. This is one of the most popular and famous bullish moving average crossover signals that is watched and talked about on financial media when they occur on major indexes. The second most popular being the loss of the 200-day moving average on a stock market index like the S&P 500 or the Dow Jones Industrial Average.
The Golden Cross happens on a stock chart when the 50-day simple moving average crosses over the 200-day simple moving average and stays above until the end of the day. This signal has you go long when the 50-day simple moving average closes above the 200-day simple moving average and takes you back to cash when the 50-day SMA closes back under the 200-day SMA which is signaling the Death Cross. The inverse of the bullish Golden Cross is the bearish Death Cross which is a signal to exit long positions or a short selling signal.
This trading strategy is best compared to buy and hold investing using it as a comparison versus the signal backtest. The Golden Cross presents a simple alternate from just holding a position and can create more returns than buy and hold investing by avoiding the drawdowns during bear markets. Exiting early in a downtrend can set up a better cost basis for a position when re-entering at the beginning of a new bull market. This is a long term strategy and closer to trend following or investing than swing trading or day trading in time frame.
The cash signal can decreases the drawdown in capital. This moving average strategy stays long in bull markets but not during sustained downtrends. It also filters out much of the noise in price action and does not create many false signals like a single 200-day moving average signal can have when prices chop around it. The weakness is that it is slow to react to quick market crashes and can be slow to get back in during fast rallies.
Below is the backtest data on $SPY from 1994 to July 2021.
The $SPY golden cross signal average return was +22.01% per trade, total return over the full backtest since 1994 was +853.91% versus the buy and hold return of +830.05%. This signal outperformed buy and hold $SPY after the cash signal during the 2001 market crash until now by avoiding the 2008 and 2020 market crashes by exiting. There was a huge outperformance that started after buy and hold took the substantial draw down in 2008 that the crossover avoided. Risk management is one of the biggest strengths of this signal. The Golden Cross avoided the big pandemic drawdown in early 2020 and continued to track the buy and hold returns closely. After the fast rally in 2020 the Golden Cross and buy and hold performance has converged after 19 years of strong out performance by the Golden Cross in both returns and drawdown as seen in the equity curve on the chart below.
This signal can be backtested on other stocks to quantify its performance, it is best used for long term markets with a bullish bias. It is a slow moving trend signal for getting in and getting out but can catch some big trends in price and avoid large drawdowns in equity.