Use the golden cross to increase your returns
Knowing exactly when to buy or sell is not easy BUT there is something that can help you – it is called the golden cross - and it can help if you are a trader or a long term investor.
What is a golden cross?
A golden cross occurs when a short term moving average (50 days for example) moves up and crosses over a longer moving average (200 days for example).
This indicates an increasing stock price and often results in higher trading volumes.
Golden cross occurs when the short term moving average (red line) moves up through the long term moving average (orange line)
Opposite is a death cross
The opposite can of course also happen, when a short term moving average moves down and crosses over a longer term moving average.
This pattern is called a death cross, and shows you that the stock price is falling and may continue falling.
Death cross occurs when the short term moving average (red line) moves down through the long term moving average (orange line)
To understand the golden and death cross, it is important to know what a moving average is.
What is a moving average?
A moving average is an indicator used to reduce the noise of daily stock price movements.
It is simply the average closing price of a stock measured over a number of trading days, typically 50 days, 100 days and 200 days.
For example, to calculate the 50 day moving average you simply average the closing price of the stock over the past 50 trading days into a single value or data point.
Moving average lags the stock price
Moving averages thus lag behind the current share price since it is based on past data. The longer the time period used to calculate a moving average, the greater the lag.
Thus, a longer term moving average (such as for 200 trading days) is used to measure long term price movements, while short term moving averages (such as for 50 days or shorter) is used as a short term indicator.
It shows you the trend
So when the short term average moves up and passes over the longer term moving average (golden cross), it shows you that there is an upward moving trend in the share price.
This is because the shorter moving average is more sensitive than a longer moving average as it reacts faster to more recent price changes.
How to use the golden cross
1. The golden cross is a good indicator to use to buy stocks
The golden cross is a great indicator to help you decide when to buy. Once you have done your research and decided to buy a company you can use a golden cross to help time your purchase.
This is also helpful as a golden cross draws the attention of other investors and thus give you an immediate profit (and higher trading volume) as other investors are also buying.
2. Better for large companies
Research has shown that the golden cross is best used for larger and more stable companies and does not work as well for smaller (more volatile) companies.
3. Longer period moving averages are better
For individual stocks longer period moving averages, for example 50 day and 200 day, provide a better signal than a moving average for a shorter period.
Indicators available in the screener
There are a couple of indicators available in the screener which allow you to use the golden and death cross to buy and sell at the right time.
For individual companies, the typical golden and death cross of 50 day and 200 day moving averages is available.
How is it calculated?
In the Quant Investing stock screener the golden cross it is called Cross SMA 50/200 (SMA = Simple Moving Average) and is calculated as follows:
Cross SMA 50/200 = 50 day moving average / 200day moving average
What do the values mean?
If the Cross SMA 50/200 value is greater than 1, it shows you that the 50 day moving average is above the 200 day moving average (golden cross), indicating an upward moving share price.
If the Cross SMA 50/200 value is less than 1, this shows that the 50 day moving average is below the 200 day moving average (a death cross), and shows you that share prices has fallen and may continue to drop.
This is what it looks like
This is how you can use one of the four funnels to select companies golden cross companies using the screener:
How to select golden cross companies
How to select golden cross companies
To select companies where the 50 day moving average is higher than 200 day moving average position the sliders from 0% to 30%.
To select companies where the 50 day moving average is below the 200 day moving average set the sliders from 70% to 100%.
To find companies where a golden or death cross has just taken place (the 50 day moving average has just crossed the 200 day moving average) set the sliders from 30% to 70%.
See the golden cross values
You can of course also see the golden cross values of the companies in your screen.
To do this click on the Choose columns button and select Cross SMA 50/200 as one of your output columns.
Show the golden cross values of all the companies in your screen
How to sort the column
Clicking on the column heading (Cross SMA 50/200 in this case) sorts the values in the column. If you click once it sorts from low to high, when you click the second time it sorts the column from high to low.
Golden cross also available for world markets and ETFs
As a subscriber you also have access to golden cross indicators applied to 42 world stock markets and 43 ETF’s.
These two reports allow you to quickly see what the major market and market sectors are doing.
Here is an extract of both reports (updated weekly):
ETF momentum dashboard including golden cross indicators
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World market momentum dashboard including golden cross indicators
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You can read more about the dashboards here:
These dashboards show you exactly what is going on in the markets
How will you know when the market turns?
In both the world stock exchange and the ETF momentum dashboard, there are a few golden cross indicators you can use.
The indicators tell you which markets or ETF’s have had a golden cross or death cross recently. All you need to do is look at the ratio of the short term moving average to the long term moving average as shown in the last four columns of both reports.
Following golden cross indicators included
The following golden cross indicators are included in both reports:
- 8 day / 20 day
- 8 day / 50 day
- 8 day / 100 day
- 8 day / 200 day
Remember a golden cross occurs when a short term moving average crosses over a long term moving average. The 50 day and 200 day moving averages are values that most long term investors use.
In the above reports we use an 8 day moving average as the short term indicator. This shorter time period will be more sensitive to price changes, thus giving you a short term golden cross (or death cross) indicator.
What the values mean
Values greater than one show you that the short term moving average (8 days in this case) is above the long term moving average - and the other way around.
Values of slightly more and less than one show you that a golden or death cross has most likely taken place recently.
Summary and conclusion
The golden cross and death cross are simple and easy to use indicators to help you time your buy and sell decisions – especially if you are more of a trader.
That said it can also help you if you are a long term investors as it can help you time your buy and sell decisions better.
For example, buy an already researched investment idea on a golden cross and wait for the price to turn up again after a death cross before buying.
Your golden cross analyst
PS To get the golden cross and more than 110 other ratios and indicators to help you make better investment decisions join now.
Why not do it now while it is still fresh in your mind.