The technical analysts analyze and interpret various patterns that candlesticks form during trading hours. They are not interested in banging their heads trying to understand the company’s annual report & what it says about its performance through the past years or its plans for the future.
Technical analysts are somewhat interested in understanding price actions, analyzing the current trend, and knowing what the technical indicators, such as moving averages, RSI, alligators, etc., have to say on further market movement. However, before going into the Golden Crossover strategy, let us understand the basic concept of TA, i.e., moving averages.
What are Moving Averages?
The average of numbers is calculated by dividing the sum of all the numbers by the total number. The concept of moving averages is similar. However, the numbers are replaced by the closing prices of a particular stock for n number of days. This moving average is known as Simple Moving Average (SMA) as it gives equal weightage to all data points.
Exponential Moving Average EMA is another type of moving average which one needs to understand. EMA gives more weightage to the recent data points than the older points for calculating the moving average & therefore is more efficient.
Moving Averages can be calculated for different time frames -minutes, hours, and days, & it works well only if there is a clear uptrend or downtrend.
What is Golden Crossover Strategy?
The drawback of moving averages is that it creates a lot of signals for trades if used individually. So, it’s better to use it with another technical analysis tool or moving average for better decision-making.
The moving average calculated for a shorter period moves along with the current market price of a stock, because of which it reacts quickly to the changes in stock price.
On the contrary, a moving average calculated for a longer period does not move with the CMP, which means that it is comparatively less reactive to the changes in stock price.
The golden crossover is a bullish pattern formed when security’s short-term moving average (for example, the 15-day moving average) breaks above its long-term moving average (for example, the 50-day moving average).
All one needs to understand is ‘when a short-term moving average crosses above a longer-term moving average, the markets are supposed to turn bullish.
How to use Golden Crossover Strategy?
Golden Crossover Strategy is a technical tool & should be used with some logic. Here are some tips which can be used for generating ideas.
- Look for Patterns:Look for setups for long downtrends like a few bullish reversal patterns, including three white soldiers, bullish flag patterns, etc.
- Use the Trendlines: One can use trendlines along with the golden cross. After observing a golden cross on a technical chart, draw a trendline and wait for the short-term moving average to either move along the trendline or break the trendline.
- Spot the Double Bottom:The combination of a golden cross with a double bottom pattern indicates a change in trend from bearish to bullish.
How do you use it?
Primarily, it would help if you spotted a double bottom pattern in the chart, following which you must wait for the formation of a golden cross, and as soon as it does, look for the long-term moving average (here the 200-day SMA) to touch the low of a double bottom.
Key takeaways:
- A golden cross is a pattern that indicates potential for a major rally.
- The golden cross appears on a chart when a stock’s short-term moving average crosses above its long-term moving average.
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