A Golden Cross occurs when the 50 Day Moving Average (Simple or Exponential) crosses above the 200 Day Moving Average (Simple or Exponential).
It is considered a phenomenally bullish signal, which can take a stock on to new highs.
A Dead Cross occurs when the 50 Day Moving Average (Simple or Exponential) crosses below the 200 Day Moving Average (Simple or Exponential).
It is considered a phenomenally bearish signal, which can take a stock on to new lows.
Now, this post has the following conditions:
a. Only FNO stocks have been tested while writing this article.
b. The post may or may not hold true for cash stocks.
c. This post is for short to medium term traders. It is not applicable for day trades.
d. Periods that should be analysed – 1 Hour and 1 Day.
WHY GOLDEN CROSS SUCKS FOR FNO STOCKS
I’ll explain this with the help of the LUPIN 1H chart
On 8-8-18, on the 1 Hour Lupin charts, the 50 EMA crossed over the 200 EMA triggering a buy at around 878 levels.
Naturally, the expectation was that the stock would head much higher as a Golden Cross does not occur every other day.
On the next day, the stock hit a high of 884.
Naturally, an investor would have held on because a Golden Cross signals a much bigger movement.
Look what happened the next day – the stock crashed all the way down to 825.
In this case, the Golden Cross did not work out.
WHY DEAD CROSS SUCKS FOR FNO STOCKS
I’ll explain this with the help of the COAL INDIA 1D chart
On 26-6-18, COAL INDIA’s 50 EMA pierced below the 200 EMA and signaled a sell at 258.
Naturally, the expectation was that the stock would head much lower as a Dead Cross on a Daily chart occurs once in a blue moon.
But, the stock rose from the next day on and went on to 287.
In this case, the Dead Cross did not work out.
WHAT TO DO TO REPAIR THE GOLDEN AND DEAD CROSS INDICATORS FOR FNO STOCKS
It’s simple – add a 100 Day EMA.
Let’s check out the charts again:
Now check the LUPIN Chart again. On 2-8-18, the 50 EMA crossed the 100 EMA and generated a buy signal at around 875 levels.
The stock hit 895 on 6-8-18, and if this signal was acted on, it would have yielded a gain of Rs 20 per share.
On 15-6-18, COAL INDIA’S 50 EMA crossed below the 100 EMA AT 279.
Subsequently, the stock fell to 258, and at the time, the Dead Cross formed.
Therefore, adding a 100 EMA can help traders who follow the Dead and Golden Cross strategies.
But wait, there is more to this whole article.
BONUS: TRADING STRATEGIES USING THE GOLDEN AND DEAD CROSS
Don’t wait for the EMA crossovers. Instead follow these strategies:
Buy when the price crosses above 50 EMA (100 EMA is target, but you can book before that)
If price continues climbing and price crosses above 100 EMA, add more (200 EMA is target, but you can book before that)
Short when the price crosses below 50 EMA (100 EMA is target, but you should work intra day for this strategy)
If price continues falling and and falls below 100 EMA, short again (this implies stock may be in bearish zone and you can keep shorting while watching price action for reversals).
Finally, remember that there will be exceptions to the rule above. For example, stocks that are subject to good or adverse news – like Rcom when it began its descent. Or Bajaj Finance when it began its ascent. In such cases the Golden and Dead crossovers will prove very effective.
This concludes the article. Thanks for reading.