Today we consider the strategy of the Golden Cross.
What is it?
Is it worth following?
What are the limitations.
These are the questions we answer and more.
- What is a gold cross?
- How do you interpret a gold cross?
- Scenarios in which Golden Cross fails
- Golden cross trading strategy
- Limitations of the Golden Cross
What is a gold cross?
A gold cross is often used in trading terminology and can be referred to as a bullish pattern scenario.
The generally accepted definition is when the 50-day moving average crosses the 200-day moving average.
The graphic below shows NVIDIA Corporation (NVDA), which had a gold cross on August 22, 2019.
The stock then experienced a sustained rally.
How do you interpret a gold cross?
A gold cross cannot be studied in isolation to understand the behavior and sentiment in the stock.
The trend before and after the crossover should be considered in order to form an opinion about the stock.
Hence, it is ideal to break down the stock’s behavior into three phases.
The first phase signals the bottom of a stock, followed by the second phase in which the 50-day day crosses the 200-day day.
This signals that the stock is gaining strength, with the final stage being the resumption of the uptrend after the crossover.
The following graphic from NVDA shows the three phases of the Golden Crossover.
Scenarios in which Golden Cross fails
Just walking long when a gold cross appears doesn’t always work.
Often times the stock will be in a consolidation phase and trading within a range and traders will be led astray for the golden cross.
The chart below shows Bed Bath & Beyond Inc. (BBBY) trading within a range in 2019.
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The stock saw two failed gold crosses and such whiplash in the stocks was enough to stop bullish traders.
Therefore, when trading such crossovers, traders should also use their skills to assess the overall trend of the stock and its usage other parameters to determine the storage strength.
Golden cross trading strategy
Traders can use the golden cross to formulate their strategy, but it shouldn’t be the only factor used when going long.
The trend and sentiment of the stock should be determined, and it should also be determined whether the stock is in the overbought / oversold territory.
The golden crossover strategy helps traders initiate a long position in the stock and it may indicate the opposite Opportunities are running out.
That’s when the 50-day moving average crosses below the 200-day moving average, also known as the “death cross”.
In this case, long traders can close out their positions.
Often times, a death cross is used by traders to initiate freshness Short positions in stock.
Here we will see how such a cross-over strategy can be optimized to increase the traders’ chances of winning.
Let’s move on to the step-by-step process in formulating a trading setup with such a cross-over strategy: –
- The first and most important step is to identify a Golden Cross on a higher timeframe, such as daily.
Here is an example of the graphic below from Amazon.com, Inc. (AMZN) where a gold cross appeared around Feb 4ththe, 2020.
Amazon Golden Cross Strategy
It is not advisable to go blind long on a gold crossover.
Traders should look to entry on a lower time frame by identifying the trend, strength, and pattern of the stock.
As seen on Amazon.com’s hourly chart, the post-crossover trend appears to be bullish with rising RSI after the stock held a support at $ 2,000 that it failed to cross on its previous attempts.
Thus, dealers can long trade in the $ 2,000-2,050 zone after the crossover.
Monitoring trade and use of a Stop-loss strategy to keep up with the trend and get off at the right time.
Traders can exit the long position if a death cross occurs, signaling the trend reversal.
In this Amazon example, the stock rebounded from $ 2,000 to about $ 3,300 in a year before witnessing a death cross around April 16the, 2021.
This golden cross signal achieved a return of 50% within a year.
Limitations of the Golden Cross
The golden crossover is a popular indicator used by traders to formulate long trade setups.
Often times, however, the stock is tied to the range and the whip saws create a problem for traders.
Hence, the golden cross cannot be used in isolation to initiate a trade.
Other indicators like volume and RSI should be combined with the crossover indicator to determine a good entry point.
Golden crossovers tend to be more reliable over longer time frames.
The Golden Cross indicator is one of the most important indicators that signals a long-term upward trend.
Due to its lag, the golden cross often generates false signals and should therefore be used in conjunction with other technical indicators.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.
The post blog first appeared on Options Trading IQ.