Moving Average Crossover Trading Strategy

A moving average crossover trading strategy is an objective, rule-based trading strategy that uses two or more moving averages to generate buy and sell signals based on trend shifts.

This approach eliminates guesswork by providing mechanical triggers: a signal is created the moment a shorter-period (fast) moving average intersects a longer-period (slow) moving average.

How A Moving Average Crossover Trading Strategy Works

The core logic of the strategy depends on the direction of the crossover:

• Bullish Crossover: Occurs when the fast moving average crosses above the slow moving average, suggesting rising momentum and a potential uptrend. The fast moving average is sshortyer than the slow one.

• Bearish Crossover: Occurs when the fast moving average crosses below the slow moving average, indicating weakening momentum and a possible downtrend.

Commonly used combinations include the 9/21 EMA for short-term trading, the 20/50 SMA for swing trades, and the 50/200 SMA for long-term trend following.

The Golden Cross Strategy and Backtest Reference

The Golden Cross is a specific, widely followed bullish signal that occurs when the 50-day SMA crosses above the 200-day SMA. Its counterpart, the Death Cross, occurs when the 50-day SMA falls below the 200-day SMA, signaling a potential bear market.

Below you see the Golden Cross’ performance from 1960 until today (excluding dividends):

Moving Average Crossover Trading Strategy

The annual return is 6.9% compared to 7.4% for buy and hold. However, you are invested at only 70%, so the risk-adjusted return is 9.88%. Max drawdown is 33% compared to buy-and-hold’s 55%.

The golden cross might underperform in bullish markets, but it keeps you out during a bear market.

It is important to note that the Golden Cross is a lagging indicator. Because it relies on long-term averages, a significant portion of the price move has often already occurred by the time the signal appears.