Let’s talk about two terms that technical traders use all the time “Death Cross” and “Golden Cross”.
In this article, you’ll learn:
- What is a death cross and a golden cross?
- Why is suddenly everybody talking about them?
- A simple trading strategy using the death cross and the golden cross
- How to use this strategy in YOUR trading (Hint: it’s very simple!)
Let’s dive right in.
Golden Cross vs. Death Cross: What’s the Difference?
What Is a Death Cross?
It’s pretty simple:
A Death Cross occurs when a short-term moving average crosses a long-term moving average.
The most popular moving averages used are the 200-day moving average and the 50-day moving average.
Example of a Death Cross
Below is a daily chart of the S&P 500 with a 50-day moving average and a 200-day moving average:
The Death Cross occurs when the 50-day average crosses the 200-day moving average from above.
As you can see, this is happening on Dec 7th, and right after it occurs, the S&P 500 drops 11%.
So the Death Cross is a bearish signal that is supposed to predict short-term weakness in the markets.
What is a Golden Cross?
So what is a Golden Cross? As you can probably guess, a Golden Cross is a bullish indicator that occurs when a short-term moving average crosses over a longer-term moving average.
The most common application is when the 50-day moving average crosses above the 200-day moving average.
Example of a Golden Cross
Here is an example of a Golden Cross that happened on July 8, 2020:
As you can see, it’s a BULLISH signal: After the Golden Cross occurred, the stock market rallied more than 33% – and it’s not over yet.
Why Is Suddenly Everybody Talking About A Death Cross?
The Death Cross has been making headlines lately because it just occurred a few days ago, on June 19th, on Bitcoin:
Why is this Bitcoin Death Cross such a big deal?
The Golden Cross occurred in Bitcoin in May 2020, and right now, the Death Cross is indicating a trend reversal, meaning that the tremendous bull run from $9,000 to $64,000 could be over.
The “Golden Cross / Death Cross” Trading Strategy
So how can traders use this in their trading?
Well, THIS is a very simple trading strategy:
- You BUY when you see a Golden Cross and
- You SELL when you see a Death Cross
So this is a very simple trend-reversal strategy.
How Accurate Is The Death Cross?
Well, let’s find out.
I programmed it into TradingView so that we can easily backtest this strategy.
The Death Cross / Golden Cross Strategy Performance For Bitcoin
I assumed that I would trade a $10,000 position with this strategy.
Over the past 10 years, there were 13 trades:
6 of them were winning trades and 7 of them were losing trades.
So the winning percentage is only 46%.
The good news: The winning trades are much bigger than the losing trades.
More good news: The net profit with this strategy would have been $1,168,302.74 – based on $10,000.
That’s an 11,683% return!
So…. do we have a winner?
Is this the simplest and most powerful strategy for traders?
Not quite… because take a look at this:
If you just bought $10,000 of Bitcoin 10 years ago and held it until now, then you would have made $71,538,104.
Wait a minute!
So if you just would have bought BTC and held it, you would have made $71 million vs. “only” $1.1 million?
So maybe this strategy isn’t that good?
Or…. maybe Bitcoin is just an exception because it has been going up like crazy?
Let’s test it on a few more stocks and see how it performs.
The Death Cross / Golden Cross Strategy Performance For SPY
The SPY is an ETF that mirrors the S&P 500.
We have more data for the SPY, so we can go back to 1994.
That’s 27 years of data.
Let’s see what results we would have achieved if we traded this strategy on the SPY.
Over the past 27 years, we would have had 25 trades.
- 12 of them were winning trades and
- 13 of them were losing trades.
So the winning percentage is 48% – very similar to the winning percentage when trading Bitcoin.
And we would have turned our initial $10,000 into $35,652.65.
That’s 356% – in 27 years, i.e. approx. 13% per year.
To me, that’s not impressive at all. I usually make 60-80% per year with my trading strategies.
But let’s compare this to “Buy-and-Hold”:
If we invested $10,000 in 1994, and didn’t do ANYTHING, it would be worth $85,703!
That’s 857% in 27 years, i.e. 31% per year.
So obviously, a simple “Buy -and-Hold” approach would have outperformed this trading strategy by a factor of more than 2!
Maybe we need to find a stock that is more “range-bound” for this strategy?
The Death Cross / Golden Cross Strategy Performance For IBM
IBM definitely fits the criteria for a range-bound stock:
Between 1973 and 1997, IBM was trading between $10 and $40.
Between 1999 and 2010, IBM traded in a $70 – $140 range.
And since 2011, IBM is all over the place:
So let’s take a look at the performance.
We can go back to 1974, that’s 47 years!
During these 47 years, there were 93 trades!
But only 24 of them were winning trades and 69 of them were losing trades.
That’s a winning percentage of only 25.81%.
This doesn’t look good.
But let’s take a look at the performance report:
Whoa!
If we had started in 1974 with $10,000 and followed the rules of this trading strategy, then we would have LOST $9,524!
And with a simple “buy-and-hold” approach, we would have made turned our $10,000 into $79,929.
How Accurate Is The Death Cross?
As you can see from these examples, paying attention to the Death Cross is as useless as bringing an accordion player on a deer hunt or screen door on a submarine.
Both the Death Cross and the Golden Cross are appearing way too late to be useful.
Take a look at the occurrence of a Death Cross last year on the S&P 500:
When the Death Cross finally occurred, the down move was already over and the stock market was on its recovery.
Is Technical Analysis Useless?
NO!
As you know, I am trading the PowerX Strategy which is based on 3 indicators:
- Stochastics
- MACD and
- RSI
And it is working VERY well for me.
With that strategy, I have been able to make $3,472 in profits on a small $20,000 accounts in less than 8 weeks!
That’s more than 17% in 2 months!
If I could keep that up, that would be 102% in a year – MUCH better than a “buy-and-hold” approach or the “Death Cross / Golden Cross” trading strategy.
If you want to know more about this strategy, click here now, and I will explain the exact rules of this trading strategy. It’s super simple, and you are going to love it. See you there.
Hmm, I think there was something wrong in the method you used for backtest the strategy in the S&P 500. Did you reinvested the dividends?
According to my backtest, the buy and hold grows to 153K, and the moving average strategy grows to 146K, still the buy and hold wins… but not for a lot.
However, if someone retired in 2000 and started to do withdrawals of 4% each year adjusting to inflation, moving averages wins by a favor of 4x (in fact, the moving averages strategy ends with almost twice the initial money and the other one ends with half of the money, in a very serious risk of being broke in few years).