Opinions are divided on the merits of certain technical analysis indicators, but many traders swear by the efficacy of the golden cross stocks pattern. Many claim it to be a vital tool in deciding when to buy and sell stocks. Stocks that create the golden cross are ones to look at with a discerning eye and see if there is opportunity there.
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Does Trading Golden Cross Stocks Really Work?
- The question remains: Does trading the golden cross really work? As it turns out, yes. There is money to be made trading Golden Crosses – only if you know how to interpret them. As a result, Golden Cross stocks can be lucrative.
Golden Cross on a stock chart: Moving Averages Create it
To understand the concept of a golden cross, and trading golden cross stocks, you first need to come to grips with the idea of moving averages.
In their most basic form, a moving average takes the closing price of a stock (from each of the previous days), over a given period- let’s say 50 days and then divided it by the same number of days (50 in this case) to arrive at an average.
As each day passes, the entire data is updated, which is what makes it a “moving” average. Yes, I know, that’s a lot to take in, but trust me, this info is going to be golden.
Why Do Traders and Investors Like Golden Crosses So Much?
Have you ever tried to tune your radio to your favorite station, but for whatever reason, you seem only to get static?
A scenario like this is, unfortunately, all too common in the trading world. With hundreds of different indicators, it’s hard to figure out which one to tune in to, and your brain becomes a muffled mess.
Investors and traders alike, love moving averages because they strip out the intra-day volatility of a share price (“noise”). And the result: A fixed trend you can track over a specific time frame.
Spotting Golden Cross Stocks In The Wild
Golden cross stocks are considered to have a bullish breakout signal. This occurs when a short-term moving average (such as the 50-day MA) sharply rises and crosses over the longer-term moving average (such as the 200-day MA.
Typically, because a golden cross is associated with a sharp upward movement in price, it is used as a buy signal with the assumption that a significant uptrend will follow.
Alternatively, the reverse is known as a Death Cross. In this situation, the 50-day MA falls below the 200-day MA, signalling a bearish trend.
As long-term indicators do carry more weight, the golden cross indicates a bull market on the horizon and high trading volumes verify it.
The Three Stages Of The Golden Setup:
- When a downtrend ends, and price hits bottom, there is a large gap between the 50 MA (faster moving average) and the 200 MA (slower moving average).
- Once the candlesticks range for a while, the price is going to go higher. At this point, the 50 MA will cross above 200 MA to fill the gap.
- Next, the uptrend begins. We now have the 50 MA or 200 MA acting as a support for the price to reach higher levels.
Finally, the uptrend finishes when the death cross happens. Just like you would expect, the death cross is the opposite of a golden cross.
We see the death cross occurring when the 50 MA (short-term moving average) crosses below 200 MA (long-term moving average).
Gold stocks performed quite well ironically with this golden cross setup!
Which MA to Choose?
Some wonder whether they should use the EMA, SMA or the VMA when calculating the golden cross. But the reality is, success in trading the golden cross strategy doesn’t come from choosing different MAs.
How to Calculate the Simple Moving Average (SMA) Golden Cross
- The calculation for the SMA golden cross is quite easy. For example, let’s say the closing price of the last four candles is $25.50, $26.00, $27.50, and $28, respectively. Crunch the numbers and your average is ($25.50+$26.00+$27.50+$28.00)/4=$26.75
If and when you continue to do this calculation for further candles, you’ll have a line in your chart, which indicates 4 SMA.
The Golden cross SMA happens when 50 SMA crosses above 200 SMA.
Here is an example of a study showing golden cross marked as well as death crosses. TradingView provides great custom studies for…free!
How to Calculate the Exponential Moving Average (EMA) Golden Cross
EMA means exponential moving average, and for simplification purposes, I didn’t include the formula. But, all you need to know is that the EMA puts more emphasis on recent data, and that’s the main difference from SMA.
Just like the SMA Golden Cross, the EMA Golden Cross happens when 50 EMA crosses above 200 EMA.
What Time Periods Should Day Traders Use?
To trade intra-day golden cross breakouts, day traders commonly use smaller time frames such as the 5 and 15-day moving averages. Spotting a golden cross on these time frames may work for you. Combining them with patterns and volume and overall price action is going to give you the greatest edge.
Verifying the Golden Cross
Many times, as with other indicators, trading a golden cross can produce a false signal if used in isolation. That is why a golden cross should always be confirmed with other signals and indicators before executing a trade.
My favorite buy signal confirmation indicators are the momentum oscillators (stochastic, MACD trading and RSI. When used together, they will tell you if the uptrend is overbought or oversold and help to pinpoint your ideal entries and exits.
Key Takeaways
- Trading a golden cross is when the short-term moving average crosses above its long-term moving average and you look to buy.
- The most commonly used moving averages are the 50-period and the 200-period moving average.
- Larger time periods tend to form stronger, lasting breakouts. (The trend is your friend)
- When spotted, the golden cross pattern indicates a potential for a significant rally or bullish price movement.
- The opposite of the golden cross is the death cross. Once spotted, traders should brace for bearish price movement.
- Use momentum indicators to verify your entry and exit points
My Final Thoughts
If you need help cutting through the noise and tuning in to the right trading strategies, look no further than Bullish Bears. Let us help you understand the different indicators to use when trading Golden Cross stocks and other technical setups.
We have a team of experts for every type of trader. Regardless of where you are or what your schedule is, you’ll find a strong community-based by solid education with Bullish Bears. Thanks for reading and be sure to check out our recent posts below!
