As we know moving averages are a very important and frequently used indicators in technical analysis of stock market , moving average are lagging technical indicators by nature and tend to react a little late to the price movements , a 5 or 10 day moving average will react frequently to the price but it also produces whipsaws , while larger moving averages like 50 ,100 or 200 Moving average are slower in reacting to price but tend to produce none or little whipsaws.
What is a moving average crossover ?
There are different types of moving averages like simple moving average ( SMA ) , Displaced moving average( DMA ) and Exponential Moving average( EMA ) , it’s not possible to explain each one in this article they require a separate article so we will just use the SMA for the sake of simplicity here in the examples below , now coming to the crossover strategy in moving averages , whenever a smaller period moving average crosses above the larger period moving average it means the stock is moving into bullish phase and whenever the smaller period moving average moves and crosses below larger period moving it means bearish phase is around the corner.
What is a golden crossover ?
So as we have learned above what crossover is , so the golden crossover occurs when the 50 day moving average starts to cross and move above the 200 day moving average thus indicating that a bullish trend in the stock market is underway and a trader must look for the opportunity to buy near an area of value on the technical chart, below is an example of the golden crossover –
Above is a chart of ultratech cement on NSE , the yellow line is the 50 day moving average and the red line is the 200 day moving average , see how the stock starts rising and the yellow line that is 50 day also starts moving up and around 3920 it crosses above the 200 moving average indicating confirmation of the bullish trend in the stock , now important thing is you can’t just buy because the shorter moving average has moved above the larger one you must look for candlestick patterns around area of value to time your entry into the stock.
See how after the crossover the stock moves higher and higher but it’s no guarantee that this will happen every time , this is why i have said that we can’t just buy because the crossover occurred we need to look for entry points at the support or trendline with candlestick pattern confirmation to plan our entries , needless to say you should 100 percent avoid shorting after the golden crossover because it is a bullish indication.
When golden crossover fails –
Above is the chart of shree cement on NSE , see how the 50 day moving average moves above 200 but fails to sustain and again crosses below, in spite of crossover taking place the stock plummeted , so a golden crossover occurred but failed clearly indicating no technique is 100 percent accurate every time in trading stocks that is why trading from the area of value and having a stop loss becomes so important , in the above example if a stock trader entered without placing a stop loss he would have been in some deep losses as the stock moved quite far in the opposite direction than anticipated.