Death Cross Trading Strategy: Statistics, Facts And Historical Backtests!
A Death Cross involves two moving averages – one short and one long, normally the 50 and 200-day moving averages. When the short moving average crosses below the long one, a Death Cross is formed. As a trading signal, it works reasonably well. Backtests reveal that the Death Cross signals short-term weakness, but in the long term, it also takes you out of many positions prematurely. If you sell when a Death Cross is formed and reenter when the opposite signal occurs, a Golden Cross, the returns are in line with the long-term averages, but you have less drawdowns (and pain?) along the way.
We backtest the following trading rules:
We use 50 and 200-day moving averages and exit after N-days as explained above.
We backtest the Death Cross in the S&P 500 because it’s the only asset we have with data going back many decades (1960).
Below are the results from the backtest.
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