Golden Cross Trading System

SAT2021-01 Golden Cross 1

This system is based on the classic Golden Cross. The Golden Cross occurs when a short-term moving average crosses over the long-term moving average. I am really just curious: is the Golden Cross a valid entry signal?

Phase 1: Plan & Design

1. Trading Idea

The big idea is to use the Golden Cross for entry, with an initial Average True Range (ATR)-based hard stop and a 20 period low trailing stop.  We will use 200 period simple moving average (SMA) (long-term) and 50 period SMA (short-term).  When the 50 period line crosses above the 200 period line, we go long/buy.

This system goes long only and is focused on equities only due to its use in the stock markets, though it should not preclude its usage for other market groups.

2. System Definition

Initial Capital: $100,000

Position Sizing:

  • Futures: 1 contract
  • ETF: 10,000 / price
  • Equities: 3.33% of $100,000 per stock = $3,333.33

Entry:

  • Enter next bar at market (open), when 50 period SMA crosses over 200 period SMA
  • Reentry if stopped:
    • Low > 50 period SMA for five consecutive bars
    • 50 period SMA > 200 period SMA

Stop:

  • Initial Hard Stop: Entry price minus 1 ATR
  • When 20 period low > Initial Hard Stop, set stop to 20 period Low

Exit: Exit when the stop is hit.
Profit Target: None
Parameters: None
Challenges: None

3. Performance Objectives

The strategy will meet the following objectives:

ObjectiveGoal
Strategy Type (trend, mean-reversion, day, swing, etc.)Trend
Risk of ruin0%
Profit Factor> 1.5
Win Percent> 30%
Max Drawdown %< 35%
Profit/Drawdown Ratio> 2.0
Ready Date2021/02/05

This idea is S.M.A.R.T.: Specific, Measurable, Achievable, Realistic, Time-bound

4. Market Selection

Markets:

EnergiesCurrenciesFixed IncomeAgricultureMetalsSoftsIndexesEquities
XX

Instruments:

NameSymbolExchange / BrokerComments
Dow E-Mini $5YMTSUse $2.50 for commission, $10 for slippage and contract rollover
SPDR Dow Jones Industrial Average ETFDIATSNo commission, .01 for slippage

Note: My brokerage charges no commission
Dow ComponentsAXP
AMGN
AAPL
BA
CAT
CSCO
CVX
GS
HD
HON
IBM
INTC
JNJ
KO
JPM
MCD
MMM
MRK
MSFT
NKE
PG
TRV
UNH
CRM
VZ
V
WBA
WMT
DIS
DOW
TSNo commission, .01 for slippage

I am selecting the Dow Industrials 30 components so that I can compare and contrast a basket of stocks against a Dow-based ETF and the Dow E-Mini. I am aware of changes in the Dow throughout time.

Chart Type, Timeframe, Session, Time Zone:

AttributeValueComments
Chart TypeRegular CandlestickCharting is only useful for validating entry and exit signals
Timeframe / Interval(s)5 min,
60 min,
Daily
Trying three different timeframes
SessionRegular
Time ZoneExchange

Phase 2: Build

5. Manual Test

Initial walk-through of two years of DIA looks like it can work.  I needed to add a re-entry rule, so I used a variation of the ‘re-initiation’ rule that 40in20out uses.

6. Build

Comments:

During build, I found that I needed to do something if we started our system in the middle of a long upward trend.  The SystemStart variable is set to 1 at the beginning (Once) and will be set to 0 (zero) once our first entry occurs.

7. Unit Test

Complete?

Phase 3: Test

8. Optimization

No optimization required for this system.

9. Walk-Forward Analysis

Dow 30 Stocks 20 years: FAIL

  • Profit Factor: 1.22
  • 22.54% win rate

Dow e-mini, 20 years: PASS

  • Profit Factor: 1.68
  • 30.51% win rate

DIA ETF, 20 years: FAIL

  • Profit Factor 1.43
  • 28.03% win rate

60 minute and 5 minute did not pass YM, so I skipped testing on DIA and the individual Dow 30 stocks.

10. Monte Carlo Simulation

Fail

11. Incubation

Did not make it this far

Phase 4: Deploy

Did not make it this far

Commentary

If YM futures worked okay, maybe we can consider ES, NQ and RTY.  Monte Carlo bombed, so it might not be worth going further with this.

Maybe Golden Cross is good for a trend filter, but definitely not for a trading signal by itself.

Sources/References

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