Does moving average crossover trading work?

Nothing on this page shows that it is. The page describes what people do and why. Published research on trading rules is mixed, results that looked good in one period have often faded in the next, and costs remove much of what remains. The loss figures that regulators require firms to publish show that most retail accounts trading CFDs lose money.

What are the golden cross and the death cross?

Names for two crossings on a daily chart. A golden cross is the 50-day average moving above the 200-day average; a death cross is the 50-day moving below it. They describe what the last 50 and 200 closes averaged. They are widely reported and are not forecasts.

Which moving averages are best for trend following?

None is best. Shorter averages react sooner and give more false signals; longer ones give fewer signals and react later. A pair chosen because it performed best on past prices has been fitted to those prices.

Moving average trend following: the crossover rule explained

On an invented price path, the price chops sideways, runs up in one long trend and then turns, with a fast and a slow average drawn through it and a trade at each crossing: 5 trades are marked, 3 closed ahead and 2 closed behind.

A triangle marks where a trade opens and points the way it was taken. A green dot is a trade closed ahead, a red dot one closed behind. The path was invented to show how the approach behaves, including where it goes wrong. It is not market data and it proves nothing.

Also searched asmoving average crossover · golden cross · death cross · trend following strategy · 50 and 200 day moving average

A description, not a recommendation

This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.

The idea

Trend following makes no forecast. It waits until a price has already been rising for some time, joins it, and stays until the rise has clearly ended. A moving average is the usual tool: the average of the last so many closes, redrawn each bar. A fast average follows the price closely and a slow one lags; when the fast one is above the slow one, recent prices are higher than older ones, and that is taken as an up-trend.

Usually heldWeeks to months · others held about as long

The rule, as people usually state it

As usually stated: go long when the fast moving average crosses above the slow one, and close, or go short, when it crosses back below. Common pairs are 10 and 30, 20 and 50, and 50 and 200 bars; a 50-bar average crossing above a 200-bar one on a daily chart is called a golden cross, and the reverse a death cross. There is no target. The exit is the opposite crossing or a stop.

What it needs from a market

Long, sustained moves: a few trends large enough to pay for many small losses.
Markets that do, from time to time, move a long way in one direction.
The patience to lose small amounts repeatedly while waiting.

What it costs

Few trades. A slow pair of averages may cross a handful of times a year on a daily chart, so the spread is a small part of the total; on a five-minute chart the same rule crosses many times a day and the spread becomes the main cost. The larger cost is built into the method: an average lags, so the entry comes after the move has begun and the exit after it has turned, and the part given up at each end is the price of waiting for confirmation. Positions held for months also pay or receive swap every night.

When it fails

In a sideways market. The averages cross back and forth, and each crossing is a small loss: buy high, sell low, repeat. This is the whipsaw.
When a trend ends abruptly. The averages turn late, and much of the gain is returned before the exit.
Over long periods with no large move, when the small losses simply add up.

The mistakes people make with it

Trying different pairs of averages until one fits the past. It has been fitted to that past and to nothing else.
Skipping signals after a run of losses. The approach depends on a few trades, and no one knows in advance which they are.
Taking the gain early. A trend follower who closes the large trade early is left with only the small losses.
Treating a crossing as a prediction. It reports that the last few closes averaged higher than the older ones.

In the rule bench

Long when the 10-bar average closes above the 30-bar average, short when it closes below, a stop 2 average ranges away, no target, 1% at risk, on the example pair.

The bench uses invented random prices, on which no rule has an edge, so it shows how the rule behaves and what it costs, not whether it works.

Try it on invented prices

Questions people ask

Does moving average crossover trading work?: Nothing on this page shows that it is. The page describes what people do and why. Published research on trading rules is mixed, results that looked good in one period have often faded in the next, and costs remove much of what remains. The loss figures that regulators require firms to publish show that most retail accounts trading CFDs lose money.
What are the golden cross and the death cross?: Names for two crossings on a daily chart. A golden cross is the 50-day average moving above the 200-day average; a death cross is the 50-day moving below it. They describe what the last 50 and 200 closes averaged. They are widely reported and are not forecasts.
Which moving averages are best for trend following?: None is best. Shorter averages react sooner and give more false signals; longer ones give fewer signals and react later. A pair chosen because it performed best on past prices has been fitted to those prices.

The words on this page

An explanation for study. It is not advice, a recommendation or a forecast. This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.