The Golden Cross Strategy

There are literally hundreds, possibly even thousands of trading strategies that can be utilized by traders and stock market participants. 

Many of these strategies rely on Moving Averages to help generate signals. 

Two of the most widely known moving average plays are known as the 'Golden Cross' and the 'Death Cross'.

The Golden Cross

The Golden Cross, as its name implies, can help identify potential turning points in the market - where a market is potentially going from a bearish scenario to a bullish scenario. 

The Golden Cross occurs when a shorter-term moving average crosses ABOVE a longer-term moving average.

Here is an example below (see screenshot example below)...

In the example above we can see the Yellow 50 Day Moving Average Line cross over and above the Green 200 Day Moving Average line - leading to a trend reversal and higher prices...

Here is another example below (see screenshot example below)...

In the example above we can see the Yellow 50 Day Moving Average Line cross over and above the Green 200 Day Moving Average line - leading to a trend reversal and higher prices...

When using the Golden Cross, traders can use a variety of different moving average lengths to trade with.

Some traders may prefer using a shorter-term moving average, such as the 10-day combined with the 50-day.

Other traders or long-term investors may prefer to look for signals based on longer moving averages such as the 50-day and the 200-day. 

When finding a Golden Cross signal, an upside crossover may be indicative of higher prices ahead as short-term demand is becoming increasingly bullish. 

The crossover of these moving averages may provide traders with a buy signal and they may look to get long the market right away or wait for a pullback to enter.

In addition to being used as a signal to buy or get long the market, a bullish Golden Cross may also be used as a signal to exit the market. 

A trader that is short the market, for example, may become concerned if the Golden Cross occurs. 

A trader that is short the market is looking for lower prices ahead.

The bullish Golden Cross may point to higher prices on the horizon, therefore, one who is short the market may interpret the golden cross as a sign to exit the short position and possibly even reverse their position as well.

The Death Cross

As its name implies, the Death Cross is the opposite of the Golden Cross and may lead to lower prices ahead. 

This moving average crossover occurs when the shorter-term moving average crosses BELOW the longer-term moving average. 

This crossover is indicative of short-term demand declining below the longer-term, and may point to further price declines in the sessions ahead.

The Death Cross may be viewed as a bearish trade signal by traders who may look to sell or get short the market when one occurs.

Traders may potentially get short the market at the current market price or may wait for a bounce higher to sell into.

The Death Cross is not only used to enter bearish positions.

Like the Golden Cross, it may also be utilized as a signal to exit a position if the trend begins to change course.

A trader that is long the market, for example, may look to exit his or her position if a Death Cross occurs.

Some traders may exit the market automatically if the Death Cross occurs while others may tighten stops or manage their risk accordingly.

One of the biggest potential uses for the Golden Cross and Death Cross is to determine market trend.

A trader or investor that is long the market may look for a continuation of a Golden Cross in order to stay long the market. 

A trader that is short the market may do the opposite, looking for the Death Cross to remain in force to maintain the short position.

The reliability of signals can depend on many factors.

Some would argue that only long-term moving averages such as the 50-day and 200-day should be used for signals.

The longer-term nature of these moving averages may effectively eliminate much of the market noise that is typically seen on a short-term basis.

Although the Golden Cross and Death Cross may be used by many traders and investors, they may prove to be far more useful when combined with other signals or indicators.

A Golden Cross that occurs at an area of support, for example, may provide a significant long opportunity for traders.

A Death Cross that occurs at an area of resistance may also provide shorts with a significant opportunity to sell the market and get short.

Whichever indicators a trader uses, the more of them that line up the better.

Used alone, the Golden Cross and Death Cross may provide many signals, some legitimate and some fake - and a complete reliance on these crosses alone could prove to cause issues. 

It's important to understand that the two types of crosses do have the potential to cause false trading signals.

For example, in the screenshot below we can see a Death Cross occur on a stock - however, almost immediately after the Death Cross signal was triggered - the stock recovered and began to rise back up again (see example screenshot below)... 

These potential false signals can lead traders to buy or sell based on the occurrence of a cross only to see the market rapidly reverse again, effectively neutralizing the cross.

Markets do spend the majority of their time moving sideways and due to this tendency they may exhibit a strong habit of generating false moving average crossovers that can lead to losses if used as signals.

This underscores the importance of using additional trading signals or indicators to place actual trades and to use proper risk management techniques to protect trading capital.

Although the Golden Cross and Death Cross are lagging indicators, they can provide much useful market information on which to take action.

However, as is the case with any market indicator, they are not entirely full-proof and when used alone it is possible to see false signals.

Used in combination with other indicators or price action, however, they may prove to be very useful tools in a trader's toolbox.