The Golden Cross strategy is formed when a short-term moving average crosses above a long-term moving average producing a buy signal. It is one of the most famous and widely used trading strategies used by both short term and long term traders of forex and CFDs.
Common moving averages used are 50 days for the short term moving and 200 days for the long term moving average. A simple moving average (SMA) is usually the moving average used. When the 50-day SMA crosses above the 200-day SMA, it is referred to as a "Golden Cross," and is considered a bullish signal, indicating that the short-term trend is becoming bullish, and that prices are likely to continue to rise. Conversely, when the 50-day SMA crosses below the 200-day SMA, it is referred to as a "Dead Cross," and is considered a bearish signal, indicating that the short-term trend is becoming bearish, and that prices are likely to continue to fall.
The Golden Cross strategy works best when prices exhibit strong trends as the indicator can be slow to pick the start of a new trend. In range trading markets it is best to avoid using a Golden Cross Strategy. Also the 50 SMA/200 SMA combination rarely produces trading signals though so more active traders shorten the moving average periods and can use a 10 SMA/30 SMA or 20 SMA/100 SMA combination. For markets that exhibit many short term trends a 10 SMA/30 SMA combination will have better results whereas in slower moving long term trends a longer moving average combination can yield better results.
The Golden Cross strategy is not only for daily charts it can be used on any chart period. It is important to check the chart period you use is displaying strong trends. For instance a day trader could choose to use a Golden Cross strategy on either a 1 minute or 5 minute chart depending on which shows the strongest trend.
How to improve Golden Cross strategy performance
There are various ways to improve the performance through extra analysis
Support and resistance
The closer buy entry to support the better as there is an increased likelihood of other traders buying as well. Also the further away the next resistance level is the great chance a large profit can be achieved. Before following a Golden Cross entry check support and resistance and if the market is close to resistance or support is far away it is better to avoid the entry sign and wait for another trade opportunity.
Time of day analysis
Throughout the trading day the market displays different characteristics. For example when the market is usually quiet like the Tokyo afternoon session trend trading is less profitable. For day traders, analyzing what times of day the market is most likely to trend will help you avoid losing trades when using a Golden Cross strategy.
A successful Golden Cross strategy requires prices to trend strongly. When there is little news the likelihood of making profits from a Golden Cross strategy is lower. Whereas a news event can push prices significantly in one direction where a Golden Cross strategy will be profitable. Spending a short time before trading analyzing the news can help you know when to use a Golden Cross strategy.
Golden Cross risk management
The basic usage of a Golden Cross strategy is to exit your position should the short term moving average cross below the long term moving average. Adding a stop loss and profit target can help you increase the profitability of the Golden Cross strategy.
To reduce your potential exit the trade should the market fall below support can be a good idea.
For example a swing trade could exit their trade should the market fall before the weekly low. Using a trailing stop where the stop is decreased as the trade makes profits can help prevent profitable trades turn negative.
When trend trading it is usually best to set a large target or no target at all and use a trailing stop. Waiting for the short term moving average to cross below the long term moving average and result in less profits. Should the market stop at resistance like a weekly high or a round figure like 150 in USDJPY taking profit on at least a portion of your position and increase the overall profitability of the Golden Cross strategy.
Golden Cross mental control
The Golden Cross strategy requires a high level of patience from the trader. Trading opportunities are rare and positions need to be held for a long time for the strategy to be profitable. When holding long term positions unexpected news can turn a winning trade into a losing trade which can be frustrating.
Through trading multiple markets at the same time you can spread your risk and reduce the potential fluctuations of your account balance. Also accepting the long term nature and usually low win rate of this strategy will help reduce stress and make it easier to follow your plan.
In conclusion, the choice of when to use the Golden Cross strategy will depend on the individual trader's trading style, risk tolerance, and market outlook. Applying some discretion on when to use an indicator with skills developed through experience and analysis can increase the profitability of the Golden Cross strategy.