Greetings traders and welcome back to another Survival Guide.
Chris here, bringing you some more information.
Today, we'll be talking about the death cross and the golden cross.
More so the golden cross because that's the term that most
traders are familiar with when we talk about either of these strategies,
and if you aren't familiar, then yes, you did hear me correctly,
these are strategies. So we will be talking about this bullish and bearish strategy
that are commonly respected in the trading world.
But before we do, if you could click that like and subscribe
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Thank you very much. Now let's get going.
The terms "golden cross" and "death cross" are very emotive, prompting
thoughts of extreme gains and extreme losses.
Luckily, this just isn't the case, as both of these can provide potentially
lucrative trading signals in either direction.
These indicators are often used in conjunction with other
short-term indicators to help flag changing trends.
Different traders have different opinions on the golden cross and death cross,
and has been the debate of subjects for some traders
for quite some time, but one thing is undeniable. There are traders
currently using both the golden and death cross that are
indeed happy with their performance.
Let's start with what the golden cross is.
In the eyes of many traders, the golden cross is the holy grail of bullish
indicators. In order to flatten out short term volatility,
traders will usually use a 50-period moving average and a
200-period moving average. Due to the lag in the two moving
averages, when a 50-day moving average is moving up through
that 200-day moving average, this is often
considered a confirmation of an emerging bullish trend.
In theory, it indicates short-term momentum and a potential
trend that is changing the direction.
Let's talk about what the golden cross tells us.
Well, obviously if we encounter a golden cross on the charts,
it's safe to say that there's never going to be any two scenarios
that are exactly identical, but there are three distinct stages
that the golden cross showcases and these are, buyers taking
control of a downward trend as number 1. By definition, due
to the short term weakness in the 50-period average, the golden
cross will occur after a downtrend.
The resulting strength in the 50-period average comes about
when the short-term sellers dry up and the
buyers begin to take control. The graph will level out and
then the buyers move into the driving seat with price moving higher.
Then we also have the momentum moves the 50-period
average through the 200-period average.
This is key. If this upward momentum continues, then eventually
the 50-period average will push through the 200-period average.
This is the point at which the eyes of many
traders start to light up and they have to ask themselves:
is this a new trend or a false flag?
Then finally, we have consolidation then resume the uptrend.
When the 50-period moving average moves sharply through the
200-period moving average, this indicates strong momentum.
Sometimes this can lead to short-term overbought situations.
These are often reflected in technical graphs by a period
of consolidation, sideways trading, or a partial retracement.
This is key moments in the market when this occurs. If the asset
price trend is changing, then eventually the buyers will regain
control, moving the asset price to higher ground. Many traders
make the mistake of buying too early before the uptrend has
been confirmed and the period of consolidation has not yet
ended. If you invest too early, you may encounter a pull
back towards the end of the 200-period
average, and the retracement below the trend line. The degree
of risk that investors take is reflected in whether they
are willing to wait and see the trend confirmed
and lose out on some of the potential profit opportunity,
or if they want to jump in early at the expense of additional risk.
Let's take a look at an example of a golden cross and
to do this, we're going to use a chart from the E-mini S&P 500, and it
will showcase what we have going on.
We have a 50-period moving average and we have a 200-period
moving average. The 50-period is going to be the green line.
The 200, naturally, would be the blue line that is currently below it.
This goes back to a period of somewhere around July
and what we saw was, that as we had been talking about, the
index began a period of consolidation and then briefly fell
back below the 50 and 200-period moving averages.
However, while the 50-period moving average remains above
the 200-period moving average, the trend is deemed to be intact.
As we can see from this shaded area, the index rebounded relatively
quickly after dipping below the 200 period average.
It was only in late October or early November that the golden
cross was finally confirmed. While the investors were looking
at this and going long in the E-mini S&P 500,
they would have eventually made some profit from their long
positions, if they held long enough.
This would have been a very interesting scenario though and
jumping in during the consolidation period can always be
seen more as a gamble.
Once the change in the trend was confirmed towards the end
of this shaded area here, this resulted in a significant upward
movement in the index and would be the ideal location that
we'd want to wait for before entering into the golden cross
for our long position.
Now, let's talk about the death cross. In simple terms
the death cross is just going to be the exact opposite of
the golden cross, indicating the weakening of a bullish trend
and the emergence of a bearish trend. Very often due to growing
short term downward momentum, this can lead to a short-term oversold situation.
It is not uncommon for the index level to rebound on or around
the death cross date itself, much like an overextended elastic
band that is pulling back.
This is all part of the death cross process.
It can prompt some inexperienced traders to jump in early,
which is why we strongly encourage familiarizing yourself
with the death and the golden cross before jumping into the
market on a live account.
Looking at this graph here, with particular focus on this shaded area
over here on the left, this perfectly illustrates the various
stages of an emerging downward trend. As we can see, the index
has been stuck in the trading range around this time for
some time before sellers finally took control, allowing
the index to drop down lower.
Now interestingly, the crossover period came just after a sharp sell-off.
There was then a few days of consolidation, another sharp
sell-off, and then another period of consolidation.
Experienced traders would have waited until the emerging downward trend
had been confirmed thereafter to jump in. Had we jumped
in early, then we may have been in for a very uncomfortable
ride during the consolidation period. Just like the golden
cross we want to get in once it is confirmed and not
once we have totally identified.
As we've mentioned before, we never want to just simply jump
into a trade for one reason and one reason alone.
It's always good to use layers of confirmation to help filter
out potentially tricky scenarios.
There are some golden cross trading strategies that we could
definitely talk about.
The first is when to commit to an investment. As we were talking
about, there are very few, if any, golden crosses are death crosses
which are not followed by a short term pullback
and a period of consolidation.
Traders will always look for confirmation that
trend has changed when trading intelligently rather than
slipping back into the previous range because they jumped
in early and now their position is unnecessarily going for a ride.
At what point do we commit our investment? Well we commit
to an investment, once we have confirmed the trend.
Then we have using additional technical indicators.
This is relatively straightforward.
It doesn't matter what the technical indicator is,
it could be the stochastic oscillator,
Bollinger Bands, other moving averages, the convergence divergence,
or the relative strength index. It doesn't matter.
The point is, we can couple our already pre-existing knowledge
of how we interpret information from other indicators to
help confirmed our identification of the golden and death cross.
Finally we have don't forget to set stop loss
limits. This is a very silly, easy process to follow but yet
a lot of traders just simply don't do it. A lot of traders
feel that they're going to exit when they want to exit and
they don't set the stop loss ahead of time, and this can be
a crucial mistake for just about any trading strategy.
We aren't always going to be correct and the moments that
we aren't, even if we're correct more than we're not, those
few moments when we're not correct,
if we're not prepared with a stop loss, those losses can quickly
erase a large series of wins that we worked so hard to achieve.
In short, let's make sure we use our stop losses and have
them in place before we open our position.
The death cross trading strategy itself can be useful when
looking to protect a profit itself from a previous position
or to take out a short position. In reality, all of the options
applicable to the golden cross trading strategy that we just
discussed are relevant to an emerging death cross trend as
well, so we don't need to repeat those. The trend is moving
in the opposite direction, that's about where the differences end.
In general, the majority of investors do tend to make
a more optimistic outlook on longer term, and as a consequence,
when a sharp downtrend emerges, many investors are looking
to bottom fish on the oversold positions. As a consequence,
we often see a sharp or short rebound from oversold
positions, which is a stronger pullback than from the overbought positions.
This is something to be aware when using the
death cross strategy. While a bone of contention with many
investors and skeptics also highlights that sometimes the
death cross trading signals are not as strong as the golden cross counterparts,
it is still a very useful strategy to be aware of.
Between the golden cross and the death cross, which is best?
Well, the concept behind the golden cross and the death
cross itself is in fact identical, except one is going with
the uptrend and one is with the downtrend.
In theory, there's really no reason why either of these respected trading
signal should be any stronger than the other, aside from the
pretense that longer term investing does usually favor the
bullish outcome, but this does not mean that, once again,
the death cross should be thrown out.
There may be difficult short-term scenarios where markets
come under pressure and it's difficult to see any potential up turn.
The coronavirus pandemic is an example of investors and markets
looking to be positive
but often finding few reasons to break free from the ongoing
skepticism and the negative sentiment. When it comes to the
specifics of trading based upon the use of technical indicators,
it is important to be disciplined. History shows that us, as
investors will take profits quicker
then if we cut our losses. This usually results in a better
scenario for us overall. The idea of banking an attractive
profit is something that is very appealing, yet
for some reason, a lot of traders just don't take advantage
of it when they are in their profitable periods of their
particular trade. The whole idea of technical analysis leading
trading ideas is based upon discipline and interpretation.
There will always be a degree of flexibility regarding interpretation
of emerging trends, but discipline is something that comes
with time and experience, so don't stress it out
if you're not exactly where you want to be right now.
But using sound-based strategies that others are finding success
with is always a very good start to getting your trading career on track.
To sum up the golden and death cross trading strategies,
we can use them as a valuable tool when we have practiced
with them, and we've understood them to their full potential.
They're very valuable tools and this is been proven time and
time again by traders who are proficient with these strategies.
That's not open for any debate.
But the reality is, you can also do poorly with these strategies
if you jump into the waters before you understand the process
or understand how they appear in various market conditions.
The overall outcome in identifying the golden cross trading
strategies is relatively beginner-friendly because it only
involves the 50 and 200-period moving average.
I do recommend checking out some charts that have a demo platform,
like we have here on the Finamark platform, to give
yourself some practicing ability before you ever consider
jumping into live markets and making some type of investment
based on what you've learned here today.
But until next time folks, happy hunting, happy trading. I'll see you soon.