Golden crossover Strategy: Lagging indicators are indicators designed to track an event or trend in the market. This indicator can help people in identifying market trends or reversals.
But these indicators are known to give a delayed signal in the market. Despite this drawback, these indicators are commonly used by individuals in the stock market.
Of these indicators, the most popularly used indicator is the Moving Average indicator. This indicator can be used in pairs to identify the bullish and the bearish trend in the market.
In this article, we will be discussing how to spot a bullish trend in the market with Golden Crossover Strategy that is derived from moving averages.
What Are Moving Averages?
Moving average is a type of technical indicator that depicts the average true value of the security that is plotted using its closing price over a specific period of time.
It is a plotted line along the closing price that depicts the average true value of the price of the security. This moving average can be plotted by using the averages of different days like 10 days, 20 days, 50 days, and so on.
The Moving average indicator can help individuals to identify the buy and sell signals and can also be used as a support and resistance line.
Apart from the above-mentioned uses, two or more moving averages can be used side by side to spot the bullish or the bearish trend in the market. One of these includes the golden crossover strategy which we will be discussing below
What Is A Golden Crossover Strategy?
The golden crossover is a strategy that is derived using moving averages. The golden crossover is a pattern that is formed when a short-term moving average moves above the long-term moving average.
This crossover shows that the short-term average price is higher than the long-term average price and a bullish breakout in the market can be expected.
The signal for the golden crossover strategy can be arrived at by using both simple moving averages pairs and exponential moving averages.
Even the range of the moving averages can vary depending on the preferences of the individual, but the most commonly used range for this strategy is the 50-day moving average and 200-day moving average.
Stages In A Golden Crossover Strategy
The Golden Crossover Strategy involves three stages that it needs to go through.
Stage 1 involves the security being in a downtrend but unable to sustain the downtrend as the bears are being overpowered by the bulls in the market
Stage 2 involves the end of the downtrend and the emergence of the uptrend in security. The emergence of the uptrend and the break out to the upside is marked when the short-term MA crosses above the long-term MA which forms the Golden Cross.
Stage 3 involves the uptrend being intact with continuing gains from the bull run in the market. In this stage, both the short-term and the long-term moving averages act as support for the price of the security.
The bullish trend is considered to be intact as long the price remains above both moving averages.
How To Trade Using Golden Crossover Strategy?
As Golden Crossover Strategy is mainly a bullish indicator, it can be utilized by individuals to help them determine when they can enter and exit the long position in the security.
Individuals can enter a long position in the security when the 50-day moving average crosses above the 200-day moving average line confirming the bullish breakout in the security.
The individuals can use the 50-day and 200-day moving averages as a support level for security. When the price moves below these moving averages, it is an indication to exit from that position of buy.
It is also considered a good time to exit the security when the 50-day moving average crosses below the 200-day moving average as it indicates the emergence of sellers in the security.
In this strategy, some individuals also enter a long position in the security when the price moves only moves above the 200-day moving average.
This is because the moving average indicator is considered as a lagging indicator that gives delayed signals. Thus, individuals may enter security early in order to benefit from the initial trend in the market.
Though, it is also important to note that this strategy involves more risk and there are more likely chances of the security moving below the 200-day moving average.
Which Time Frame To Use For The Golden Crossover Strategy?
The Golden Crossover Strategy can be used on any timeframe and is dependent on the preference of the individuals.
While some focus on daily or weekly timeframes for long-term buying opportunities and intraday or hourly timeframes for short-term buying opportunities.
But it is important to note that, the accuracy of the strategy will depend on the timeframe you use.
The signals created by the crossover in the longer timeframe tend to be more reliable but they appear less number of times.
While on the shorter timeframes, you get more frequent signals but the accuracy may be on the lower side.
Another important thing to note here is, this signal works best in a directional market. That is, the crossover signal will be more accurate if it appears when the security is moving upwards after a bearish trend.
If the crossover signals appear in a choppy market, the chances of you hitting stop losses increase by a large percentage.
Advantages Of Using The Golden crossover Strategy
- As the moving average is based on the past price of the security, the signals provided by the crossover strategy are highly accurate.
- This strategy can be used on any timeframe based on the preference of the individuals.
Disadvantages Of Using The Golden crossover Strategy
- There is a high chance of this strategy generating a false signal in a volatile market.
- This strategy gives the most accurate signals only in longer timeframes and when it involves higher trading volume.
In this article, we discussed what are moving averages, what is Golden crossover Strategy, its stages, how to trade with it, and also its pros and cons.
A golden crossover strategy is a reliable tool that can be used by individuals to benefit from the bullish trend in the market.
But as this signal is only used to signal a bullish trend and not a bearish reversal, individuals should have a proper risk management strategy in place in case the security starts reversing in the downward direction.
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