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We shall explore the popular Golden Cross trading strategy in this article. This straightforward and effective trading technique uses two Moving Averages of different periods.
Why is it called the Golden Cross?
The crossover of two Exponential Moving Averages (EMA) with different periods serves as the strategy's primary signal. MAs have long been recognized as an easy-to-use and effective tool for technical analysis.
This approach is named after the way two MAs cross each other on a chart, which resembles a cross. The Golden Cross is a buy signal that prints on the chart when the fast EMA crosses the slow one from below.
The market shifts from being bearish to being bullish as a result. The Death Cross is a reversed sell signal that comes when the fast EMA crosses the slow one from above. This indicator indicates that the bears are now outperforming the bulls. As such, a downtrend is starting to develop in the market.
The main rules and peculiarities of the Golden Cross
The Golden Cross is a trend strategy, thus it performs well when the market is experiencing a strong trend. A fast EMA with a period 50 and a slow EMA with a period 200 are typically used in this technique.
A new trend in the market starts when these two EMAs cross and the price breaks out of a flat. Daily charts are typically used by long-term traders and investors. We advise using shorter charts i.e. H4, H1, M15 for mid-term and short-term trading.
The EMAs' conventional periods are 50 and 200; however, if backtesting shows that other periods perform better, you can use them. MAs are included in the most advanced trading platforms, as they are sketched right on the price chart.
You can add MAs to the price chart using the Main Menu: Insert - Indicators - Trend - Moving Average on popular trading platforms MetaTrader 4 and MetaTrader 5. Select the periods (50; 200), the line color, the line width, and the MA type: Exponential in the settings box.
The drawbacks of the Golden Cross
In the conventional type, we can enter the market as soon as the MAs cross; a stop loss is set above or below the nearby high or low, and the profit is locked when the EMAs cross again.
The big stop loss and the possibility of losing a significant portion of the profit if the market suddenly reverses downwards are the negatives to this trading technique.
Hence we may add more tools to the approach to increase its effeciency. To determine the best entry point, use an additional oscillator or technical analysis signals. We might even employ crucial support and resistance levels, a trailing stop, or additional indicators to lock in the profit.
Opening a buying Trade
The fast EMA with period 50 (yellow) crosses the slow EMA with period 200 (blue) from below, which indicates a Golden Cross buy signal. We can initiate buys with a stop loss placed below the local low of the price chart once the EMAs cross. Profit is locked when the MAs cross backwards.
Let us include the RSI signals with a standard period 14 to increase the effeciency of the technique. Watch for the RSI line to dip below 50% once the Golden Cross gives us the go-ahead to buy.
Initiate a buying position with a stop loss just below the local low once it returns above 50%. Lock in profit if the RSI, after rising, shows a reversal and leaves the overbought area (the 70% level.)
Opening a selling trade
When the fast EMA with period 50 (yellow) crosses the slow EMA with period 200 (blue) from above, the Death Cross, a sell signal, is the result. Accordingly, a downtrend could begin.
We can initiate a selling position once the MAs cross, locking in the profit when the MAs cross again. Place the stop loss above the price chart's local high.
Include the RSI with period 14 on the chart to identify more ideal entry points. Wait for a pullback to start once the MAs have crossed before acting until the RSI line crosses the 50% level. Initiate a selling position after the RSI line has crossed the 50% level from above.
On the price chart, place a stop loss above the recent high and lock in profits when the RSI reverses upward following a dip and leaves the oversold region (the 30% level.)
Who will this strategy suit?
The conventional version of the Golden Cross is suited for long-term traders and investors with substantial deposits. The stop losses are occasionally quite large when we enter the market immediately following the two MAs' crossing on D1.
It may also take some time for the trend to end before we can lock in a profit. We cannot afford to wait for the daily trend to end if we trade in the short term with a modest deposit.
As a result, traders with little deposits should trade over shorter time frames, employ extra instruments to identify better entry points with moderate risk and close the trade at the time.
Closing thoughts
The conventional trend strategy that has been predicated on the crossing of two MAs is the Golden Cross. It performs well when there is a strong trend present.
When the market is in a flat, however, it could produce unreliable losing signals. We can also use other tools, such as oscillators, levels, technical analysis and price action patterns, to determine the best entry and exit opportunities.
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