What is the Golden Strategy?
This is a strategy involving the trading occurrence know as a Golden Cross caused by two Moving Averages.
Moving Averages (MA)
A Moving Average shows the average price of the asset frequently during a chosen period of time on the chart. It is frequently used by traders to determine the trend direction of an asset. The trend indicating whether a purchase or sale of the asset should be considered.
The most popular Moving Averages used by traders are:
- Simple Moving Average which operates on the simple average price over a period of time.
- Exponential Moving Average operates on recent price ranges.
- Volume Weighted Moving Average Emphasis on prices with high volume
The averages commonly referred to for moving average crosses in trading are the 50 day known as the short term moving average and the 200 day known as the long term moving average.
A Golden cross occurs when a long (bull) trend (MA) is heading higher while a bear trend (MA) is heading lower. The resulting cross created by this crossover of trends is known as a Golden cross. In basic terms, this is a possible indication that the asset associated with the chart is becoming bullish and its value may increase.
Of course, there is an opposite to the Golden Cross moving average crossover…. the DEATH Cross
A death cross occurs when a short (bear) trend (MA) is heading lower while a long (bull) trend (MA) is heading higher. The resulting cross created by this crossover of trends is known as a Death cross. In basic terms, this is a possible indication that the asset associated with the chart is becoming bearish and its value may decline.
Death crosses are very well known in financial trading so their appearance in a stock market index such as the s p 500 will make headlines.
Bull or Bear
The type of cross can be then considered as an indicator for the possible future trend of this asset class.
As the golden and death crosses are exact opposite predictors of possible trends.
Please note that although the death cross preceded the economic downturns in 1929, 1938, 1974, and 2008 but occurred many times.
A death cross appearance does not always correctly indicate a long term decline in the asset.
Of course, its impact when correct can be substantial for instance the Dow Jones made a death cross in Jan 2008, a bear market occurred for the next 14 months causing a 50% drop in value.
That’s why it makes headline financial news!
The same applies to the Golden cross, its appearance is an indicator to be considered.
NOT a guarantee of asset inflation!
For both the death cross and the golden cross an appearance on a chart is considered more indicative by analysts and traders when a high trading volume is occurring. As this informs use that price action is occurring, a trend change may happen and a convergence divergence could be in play.
Analysis of the asset and the underlying reasons for the occurrence of the cross should inform your trading decision.