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 an opportunity there.
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Golden Cross Stocks Introduction
The question remains: Does trading the Golden Cross 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.
To understand the concept of a golden cross and trading golden cross stocks, you first need to come to grips with 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 divides it by the same number of days (50 in this case) to arrive at an average.
As each day passes, the data is updated, making it a “moving” average. Yes, I know, that’s a lot to take in, but trust me, this info will be golden.
Benefits of Golden Cross Stocks
Have you ever tried to tune your radio to your favorite station, but you seem only to get static for whatever reason?
Unfortunately, a scenario like this is 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 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
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, assuming 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, signaling a bearish trend.
As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon, and high trading volumes verify it.
Three Stages of the Golden Setup
- When a downtrend ends and the 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 will go higher. At this point, the 50 MA will cross above the 200 MA to fill the gap.
- Next, the uptrend begins. We now have the 50 MA or 200 MA supporting the price to reach higher levels.
Finally, the uptrend finishes when the death cross happens. As expected, the death cross is the opposite of a golden cross.
The death cross occurs when the 50 MA (short-term moving average) exceeds the 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 VMA when calculating the golden cross. But the reality is that success in trading the golden cross strategy doesn’t come from choosing different MAs.
Simple Moving Average (SMA) Golden Cross Calculation
The calculation for the SMA Golden Cross is quite easy. For example, 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 this calculation for further candles, you’ll have a line in your chart indicating the 4 SMA.
The Golden Cross SMA happens when the 50 SMA crosses above the 200 SMA.
Here is an example of a study showing golden crosses marked and death crosses. TradingView provides great custom studies for…free!
Exponential Moving Average (EMA) Golden Cross Calculation
EMA means exponential moving average, and I didn’t include the formula for simplification purposes. But all you need to know is that the EMA puts more emphasis on recent data, and that’s the main difference from the SMA.
Like the SMA Golden Cross, the EMA Golden Cross happens when the 50 EMA crosses above the 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 five and 15-day moving averages. Spotting a golden cross on these time frames may work for you. Combining them with pattern volume and price action will give you the greatest edge.
Verifying the Golden Cross
As with other indicators, trading a golden cross can often produce a false signal if used in isolation. Before executing a trade, a golden cross should always be confirmed with other signals and indicators.
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 averages.
- Larger 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.
