Learn about two of the most popular technical analysis charting patterns, the death cross and golden cross, and how to trade these strategies in stocks and forex markets.
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The death cross and golden cross are technical analysis terms for when a moving average (MA) intersects with another from either above or below. These technical charting patterns can occur in stocks, forex, ETFs and other financial markets.
The cross, depending on which it is, can signal the start of a new trend or the end of one. In this article, we explain how to identify and interpret a golden cross from a death cross, as well as the strategies for executing trades with them.
The death cross and golden cross are simple technical analysis indicators that alert traders when a price trend may be turning bearish or bullish.
The indicators use both 200-day and 50-day MAs to signal whether a death cross or golden cross has occurred. When the 50-day MA crosses above the 200-day MA from below, this is a golden cross. Meanwhile, a death cross is when the 50-day MA is above the 200-day MA and then crosses below the 200-day MA.
A golden cross indicates that prices may be starting to rise in a new uptrend and, therefore, a long position may be preferred by traders. Once a death cross occurs, the price of the asset is potentially starting a new downtrend, which could mean that short selling or exiting long positions would be preferred by traders.
Since these are longer-term MAs, the signals are not typically used for day trading. However, the same concept could be applied to a one-minute chart with 200-minute and 50-minute MAs.
The 200-day and 50-day MAs are not set in stone. A trader may opt to use different MA time horizon lengths. In that case, a death cross is when the shorter timeframe moves below the longer timeframe, and the golden cross is when the shorter one moves above the longer one.
Simple moving averages (SMA) calculate the average of price data over the period. They are the more widely used MA, although each trader can decide for themselves which type of moving average they prefer. One is not better than another.
The calculation for an exponential moving average (EMA) places a higher weighting on recent price action than an SMA does. This means that an EMA reacts more quickly to price changes. For example, if the price of an asset drops, a 200-day EMA will start to turn down before a 200-day SMA. This means the SMA is slower to react to price changes.
Both are useful in that they are both providing slightly different information. Traders and investors usually pick one type of MA and stick with it.
Investors often use these signals on a daily price chart since the death cross and golden cross use 200-day and 50-day MAs.
Traders are not confined to these parameters. They may opt to use 200-period and 50-period MAs on any timeframe of their choosing. Applying these indicators to a one-minute or five-minute chart would provide short-term trade signals and highlight potential short-term changes in direction.
An hourly or 4-hour-chart would provide slightly longer-term signals of trend changes, over weeks and months typically. Applied to a weekly chart, the MA would highlight trend changes over the course of many years in some cases.
The time periods of 200 and 50 could also be altered. Some traders prefer using a 100 and 20, or 50 and 10. The idea is the same. When the shorter-term MA crosses the longer-term one, it may signal that a trend change is underway on that timeframe.
The chart below shows two examples of a golden cross in the currency pair EUR/USD.
The first buy signal occurs when the 50-day MA crosses above the 200-day MA based on a daily close. A trade is placed at the start of the next price bar at 1.1294. The trade remains open until the 50-day MA crosses back below the 200-day MA.
In the above example, this occurred almost a year later. The closing price for the trade was 1.1776. If a trader is risking £1 per pip on a spread betting trade, the trade profited £482 ((1.1776 – 1.1294) x £1).
The next golden cross didn’t fare as well. When the bullish crossover occurred, the trade was taken at the start of the next candle at 1.2090. The sell signal occurred a little more than two months later at 1.1866. If risking £1 per pip on spread bet trade the loss amounted to £224 ((1.1866-1.2090) x £1).
There are also overnight holding costs or credits to consider when calculating profit/loss, which could increase or decrease the overall return. In forex, holding costs are affected by the interest rates of the countries in the currency pair (EUR/USD, in this case). At the time of these trades, the overnight holding costs were £0.56 per day for this bet size.
The chart below shows two examples of the death cross using the UK 100 stock index. These examples use a one-minute chart and a 200-minute and 50-minute MA. The shorter timeframe helps to avoid overnight holding costs since trades typically only last several hours or less.
The first short on the death cross occurred at 7164.87, with an exit at 7169.97. If the trader risked £10 per point, this would have netted a loss of £51 ((7164.87 – 7169.97) x £10).
The second trade results in a profit of £181.90 if risking £10 per point. The entry is 7162.40, and the exit is 7144.21.
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Several studies have been conducted on these crossover signals. Most have looked at buying an index fund or ETF, like the S&P 500, when a golden cross occurs, and then selling when the death cross occurs (without shorting).
In one backtesting study by the Trade Risk, covering a period from 2000 to 2020, the strategy returned more than 118%. Buying and holding the same fund over the same period would have returned 263%.
In another study conducted by the Chart Report, covering a period from 1896 to mid-2016, it was found that the average return on a golden cross was 2.12% three months after the signal occurred, and 3.43% six months after the signal. Buying on the golden cross produced a profit just over 60% of the time, and lost money just under 40% of the time. Winning trades were marginally more profitable than losing trades.
This data indicates that it is possible to make money using the method, but the returns tend to be inferior to even a buy-and-hold strategy. Therefore, the method is more likely to be used in conjunction with other strategies to help boost the returns.
Another technical charting pattern is when the price of the asset crosses above or below a MA.
For example, if the price crosses above a MA from below, that could signal the start of an uptrend. When the price crosses below a MA, that could signal the start of a downtrend.
Shorter-term traders may use a 10- or 20-period MA on their chosen timeframe, such as a one-minute or five-minute chart. Longer-term traders may use a 50-, 100-, or 200-period MA on an hourly or daily chart, for example.
How can I manage my risk when trading golden and death crosses?
Stop-loss orders are a common way to manage risk. A stop-loss is an exit order that closes the trade if the price moves in the wrong direction by a specified amount or a certain amount of money is being lost. Position sizing is another way to manage risk. Here, you control the size of the bet to increase or decrease the risk on the trade.
Can I automate a golden/death cross strategy?
MA crossover strategies are one of the simplest strategies to automate since the buy and sell signals are clear cut, and there are only two indicators. Automating strategies requires some programing knowledge. MetaTrader 4 (MT4), the international platform which we offer to our clients, has its own programing language and built-in coding capability for automated strategies. Learn more about MT4.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
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