The fraternity of technical analysts is often dubbed as ‘financial astrologers.’ These smarties are always hooked on the screens analysing and interpreting various patterns that candlesticks form during the trading hours.
People from this pack are not interested in banging their heads trying to understand what a company’s annual report has to say about its performance through the past years or its plans for the future.
They are rather interested in understanding price actions, analysing the current trend, and knowing what the technical indicators, such as moving averages, RSI, alligators, etc., have to say on further movement in the markets.
Today, we’ll be focusing on a technical analysis strategy that has helped umpteen traders make profits, and much evident by this blog’s title, it’s ‘How to predict stock trends using the Golden Crossover Strategy?’ But before that, let’s learn about a building block of technical analysis--Moving Averages. So, let’s begin!
What are Moving Averages?
We all know what averages are; just add the group of numbers, then divide it by the total number of those numbers, and we’re good to go!
The concept of moving averages is also the same. It’s just that ‘the group of numbers’ here is ‘the closing prices of a particular stock’ across ‘n’ number of days. This type of moving average is known as Simple Moving Average (SMA) as it gives equal weightage to all data points.
Another type of moving average which you must understand is Exponential Moving Average (EMA). EMA is a more efficient option as it gives more weightage to the recent data points than the older points for calculating the moving average. On the other hand, SMA uses the previous day’s closing price (older points) of a stock.
Moreover, you must also know that moving averages can be calculated across different time frames like minutes, hours and days, and it works well only when there is an upward or downward trend.
Hope you understood what moving averages are. The time has come where we dive into our lesson for the day. Check it out!
What is Golden Crossover Strategy?
So here comes the protagonist of the blog, the Golden Crossover Strategy of Investing. Actually, the pain point of moving averages is that it creates a lot of signals for trades if it is used individually. Therefore, it’s better to club it with some other technical analysis tool or with another moving average for better decision-making.
Remember we told you that moving averages can be calculated across different time frames; this is where it comes into use.
The moving average calculated across a shorter period moves along with the current market price of a stock because of which it also reacts quickly to the change in the stock’s price.
On the other hand, a moving average calculated across a longer period does not stick with the current market price, which also means that it is comparatively less reactive to the change in stock price.
The golden crossover strategy is based on this characteristic of the moving average. It helps spotting the change of trend from bearish to bullish as the 50-day moving average intersects and starts moving above the 200-day moving average.
Also, we earlier mentioned the 50 and 200 days moving average, but there is nothing mystical about them. All you need to keep in mind is that ‘when a short-term moving average crosses above a longer-term moving average, the markets are supposed to turn bullish.
As the short-term moving averages move closer to the current stock price, it shows the strength of a current trend. Therefore, when it crosses a long-term moving average (that is less reactive to the current situation) and starts moving upward, it is opined by technical analysts that the market for this particular stock is going to turn bullish.
In a nutshell, we have now what the strategy is, isn't it? But how we apply it is another question...
How to use Golden Crossover Strategy?
Blatantly looking for a golden cross and then going long on a stock is not what you are supposed to do. There must be something concrete to support this view, as a golden cross is nothing more than a technical indicator. Therefore, here are a few tips on using them not for profit generation but for idea generation.
Look for Patterns: A golden cross alone is vague. Therefore, it’s better if you look for setups for long downtrend like a few bullish reversal patterns, which includes three white soldiers, bullish flag pattern, etc.
Use the Trendlines: If you are already into technical analysis, you would know how much importance a trendline carries, and so you can use it along with the golden cross too!
How? Well, after spotting a golden cross on a technical chart, you can draw a trendline and wait for the short-term moving average to either move along the trendline or better if it breaks the trendline.
So, how do you use it?
Primarily, you need to spot 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. Simple!
So we started from what Moving Averages were then understood about the Golden Crossover and how to use it. Now, let's put the strategy into use!
Top Stocks picked using Golden Crossover strategy
To help you understand how you can put the strategy to use, here are some stocks that can be picked using the Golden Crossover strategy:
ITC is a lead runner in the Fast Moving Consumer Goods sector in India. It has a well-diversified sustainable business, where it deals in cigarettes, hotels, paperboards, packaging, personal care products, etc.
The company enjoys dominance in the industry by its low-cost manufacturing process, efficient distribution networks in addition to its strong research and product development.
Paisalo Digital Ltd
The company is into various businesses like the financial services division, where it is engaged in buying and leasing motor vehicles and offering loans for personal & business purposes. It is also registered under category ‘B’ as a non-deposit-taking NBFC with the Reserve Bank of India.
The company also extends its arms into a microcredit division which provides loans to low-income households. Lastly, they also have a presence in the alternate energy division where it owns a 0.8 MW Enercon make WEG installed at Jaisalmer, Rajasthan.
The company enjoys a king-size status quo in India’s engineering sector, where it provides services in agriculture, infrastructure, and railways.
Its agricultural division offers tractors starting from 12 HP in the following brands; Farmtrac, Powertrac, and Steeltrac.
Under the infrastructure head, the company provides construction equipment and finds its place amongst the world’s largest manufacturers of Pick and Carry hydraulic mobile cranes.
That’s not all, Folks! The company also has its hands in manufacturing advanced components for brake systems, couplers, suspension systems, and shock absorbers under its Railway Equipment Division.
Taj GVK Hotels & Resorts Ltd.
This world-class chain of hotels is a joint venture of the Tata Group’s Indian Hotels Company Ltd, which holds a 25.52% stake, and a Hyderabad-based GVK group that owns the remaining 74.48%.
They currently operate Taj Banjara known for its modern amenities and private lake, Taj Krishna, their flagship hotel, Taj Deccan, Taj Chandigarh, and Taj Chennai.
You all must have heard about the Japanese candlesticks, Fibonacci numbers, and various fancy chart patterns like the morning star, evening star, hammer etc. Well, it all means nothing if you don’t have anything concrete to support it.
Therefore, a combined approach of technical and fundamental analysis is the best approach. While the technical analysis can help you spot the entry, exit points and trend reversals, the fundamental analysis can help you understand the sustainability of the company you are trading in.
Today, we covered the concept of spotting the pattern and working with it following the above-stated guidelines.
However, stock market enthusiasts must always refrain from excessive speculation, which comes in hand with technical analysis. They should instead focus on taking and risking their money based on an informed decision.
What’s your favorite trading strategy & how successful have you been using it? Tell us in the comment section below.