Golden cross is a famous & widely followed trading signal due to how well this signal has performed in forecasting the U.S. equity markets. Learn about the bull cross trading strategy below.
Some time ago, I wrote about how the U.S. Dollar Index had just made a “golden cross” the previous week. This is when the 50-day moving average crosses above the 200-day moving average and is a very widely followed technical bullish signal.
You might ask why the “bull cross” is such a famous and widely followed trading signal. Basically, it is due to how unbelievably well this signal has performed in forecasting the U.S. equity markets.
Equity markets in general exhibit a bullish bias. The U.S. stock market has over the previous half-century been the most bullish of all.
Since 1970, there have been a total of 24 bull crosses made by the S&P 500 Index, which is the major U.S. equity index. It is a capitalization-weighted index of the largest 500 publicly traded American companies.
Let us suppose you had bought and held this Index from the end of the day when the bull cross occurred, for a defined amount of time. The results are shown in the table below:
These are very impressive results. Remember though that this is just the Index. If your stock-picking abilities are any good, you should be able to magnify these returns by a large factor, implementing a double whammy of buying top-performing stocks near the beginning of a new bull market.
When is the Best Time to Trade the Market?
Taking historical daily data from the major U.S. stock index, the S&P 500, since 1970, we can use the “bull cross” signal to determine whether market timing is a profitable approach. This is done by comparing average price changes in the index over a future period between the days when bull crosses occur, to future price changes in general.
The results show that when it comes to buying the major stock index, using the bull cross has been a more profitable approach than buying randomly, indicating that this can be the best time to trade and suggesting that the market can be “timed”. Buying the index upon a bull cross produced an average return of 4.70% holding for 3 months, 7.08% holding for 6 months, 11.88% holding for 1 year and 17.94% holding for 2 years.
These results can be compared to buying randomly, which is obviously a much bigger sample as there have been only 24 bull crosses since 1970. Here, average returns were achieved at 2.04% holding for 3 months, 4.21% holding for 6 months, 8.63% for 1 year, and 17.86% for 2 years. Every single result is lower than its equivalent achieved using market timing through the bull cross, but it is notable that the differences were much more significant within the shorter-term holding periods.
So, there is evidence that market timing has worked in buying stocks, but what about in Forex transactions? The closest equivalent to buying stocks would be buying the U.S. Dollar, and we can perform a similar experiment using historical data for the U.S. Dollar Index, using the same bull cross, and holding period methodology. My data begins in 1995 which was chosen arbitrarily. This is not precisely the same period as was used for the stock market index back test, which was more than twice as long, but it still represents twenty-one years of data.
To my surprise, you can also time the Forex market, or at least the bull cross on the U.S. Dollar Index. Buying the index upon a bull cross produced an average return of 1.78% holding for 3 months, 2.25% holding for 6 months, 1.98% holding for 1 year and 4.94% holding for 2 years.
These results can be compared to buying randomly, which is obviously a much bigger sample as there have been only 12 bull crosses since 1995. Here, average returns were achieved at 0.32% holding for 3 months, 0.69% holding for 6 months, 1.41% for 1 year, and 2.84% for 2 years. Every single result is lower than its equivalent achieved using market timing through the bull cross, but it is notable that the differences were much more significant within the shorter-term holding periods.
Although it is important to note that the “bear cross” (the opposite signal to the “bull cross”, where the 50-day moving average crosses below the 200-day moving average) did not produce superior results to selling the U.S. Dollar randomly, it did not work with the stock market index either.
It seems clear, based upon the testing of historical data shown here, that it is possible to time the Forex market, just as it is possible to time the stock market. The size of the moves in the Forex U.S. Dollar Index have, however, been shown to be much smaller than the equivalent increases in value in the stock market index. One way to compensate for this differential could be to use leverage intelligently and carefully, but great caution must be exercised in doing so.
Market Timing Strategies
We have already looked using moving average crosses of two key averages – a faster and a slower one – as a method for judging whether a market is ready to move in one direction. The moving average cross is a very well-established strategy but is far from the best timing tool available.
Another timing method that has historically worked well with Forex currency pairs is to simply look at a long-term chart going back a few months and ask if the price has been steadily rising or falling during that period. If so, and especially if it is breaking out of a range, then the odds can be taken to be in favor of that move continuing with some force.
When it comes to day trading shorter time frames, another timing edge can be gained by looking to initiate trades during the most active hours of the market, which are usually the best time to trade. When these coincide with the regular opening hours of major financial centers such as New York, London, and Tokyo, a timing edge can often be gained, as these times typically see an uptick in volume and often momentum too.
Finally, external factors should not be overlooked. When big political or economic events happen, especially if they change a consensus or balance of opinion, related markets are more likely to make strong directional moves, even if they do not seem to be logical. For example, the recent surprise result of the U.S. Presidential election moved most markets strongly, even if not in the directions that were necessarily anticipated. The crucial thing was, that the market was moving, and it had some fundamental or sentimental reason to be moving.
In terms of buying the U.S. stock market, it has certainly been possible over recent decades to produce superior results outperforming buy and hold strategies by using some fairly simple long-term market timing strategies.
Market timing has not worked so well in Forex markets but has produced excess returns when applied to buying the U.S. Dollar Index, or by implication, being long on the USD side of major Forex currency pairs.
What is Golden Cross and Death Cross?
The golden cross is when the 50-day moving average crosses above the 200-day moving average. The death cross, otherwise known as the bear cross, is when the 50-day moving average crosses below the 200-day moving average.
What is a golden cross in trading?
The golden cross in trading is when a 50-period moving average crosses above the 200-day moving average on the same chart, and it is has been used as a buy signal since the beginning of technical analysis in financial markets. The periods applied are usually daily, but the cross is sometimes also watched for on other time frames using the same periods.
How reliable is a golden cross?
Over recent decades, the golden cross has outperformed buy and hold strategies in both the U.S. stock market and in the U.S. Dollar Index, so it is a relatively reliable technical signal.