The Golden Cross trading strategy is a relatively simple trend strategy that looks for trading setups after a Golden Cross has formed on the chart. Indeed, the Golden Cross occurs after a trend change in the price chart. As already discussed in this first article, it's generally not a good idea to randomly buy a stock just because a Golden Cross signal has formed.
Keeping an eye on the price action after the signal and waiting for a price correction in the new trend creates great opportunities where you can enter the market with relatively little risk.
As with all strategies, position size and sound risk management will play a large role in whether or not you will become successful in the long run.
After a Golden Cross has been formed, it is important to patiently keep an eye on the chart. In ChartMill you can easily create personal watchlists of stocks where such a signal has recently occurred.
In the example below you'll find the chart of Marathon Oil Corp. (ticker: MRO) on the date of December 16, 2020. The blue line is the SMA50, the red line is the SMA200. That day the short SMA50 cuts the long SMA200 upwards, leading to the formation of what is known as a 'Golden Cross'. This also provides confirmation of the bullish trend that began in the first weeks of November 2020.
From then on we will keep an eye on the chart for possible long setups. Some of the things we were able to determine on December 16 regarding price movement are the following:
When analyzing this daily chart, it is important not to lose sight of the long-term trend. Use the top down approach and include a higher timeframe in your study as well. Therefore, below I have depicted the weekly chart to the right of the daily chart which - as with the daily chart - ends on December 16, 2020, this is when the Golden Cross formed on the daily chart.
On the weekly chart on the right, I have drawn a downward trend line based on the April 2019 top and the lower high that dates back to late December 2019. If this line is extended, we observe that the current price is right below this trend line. Taking into account that the previous 6 weeks the price ended higher each time (6 consecutive bullish weekcandles) it is plausible that this same trendline will act as a resistance that should not be underestimated.
We already know that the mere formation of a Golden Cross should not be used blindly as an entry signal. MRO is a textbook example of this:
Suppose we had bought some shares despite these contradictory elements? Let me show you the actual buy setup below on the daily chart.
As can be seen on the chart, the long position was stopped out shortly after the entry and the price indeed went lower. However, the trend is still positive as is the SMA50 for that matter which is still above the SMA200. Let's look further to December 31, 2020.
Three things stand out:
Below is the chart for January 04, 2021:
Remarkable buying volume during the formation of a bullish doji candle. Initially it seemed that after the inside candle of the previous day the price chose the way down. However, the willingness of buyers was more than large enough to push the price up again.
Finally, on the date of Tuesday, January 05, 2021, the breakout occurs under remarkably increased volume. The price rises by more than 9% that day.
And this is the weekly chart on date of Tuesday, January 05, 2021:
At the same time, the breakout ensured that the descending trend line on the weekly chart was also overcome. On the basis of all these elements a buy order can then be issued. For this purpose we take the high of the break-out candle ($7.82) as the entry zone:
The initial stoploss is just below the blue breakout candle. Following stocks in such a way and patiently waiting for several elements to come together ensures that you can enter the market very precisely and with a clearly defined risk.