Is it a good time to buy stocks? From few months investors seem to be in good moods and are buying stocks. Does it mean that we can put all the bad things behind us and start buying stock even stronger?
Everybody (or almost everybody) is looking at Golden Cross at S&P500 index and other major indexes.
What is Golden Cross?
Quick reminder: Golden Cross is a cross of two moving averages, where short-term average breaks above long-term average.
There is also Death Cross, where short-term average breaks below long-term average.
You can use whatever average you want to, but it is a good idea to have a look at most popular kinds.
Two most popular averages are 50 and 200 (in my opinion). Many traders also look at different averages, but this is not article about averages.
Golden Cross is very popular…
There is a strong buzz around Golden Cross at SP500 in media so more investors are watching markets right now. It is very popular signal, yet I do not think it is a good one to use in your decision making process. Why is it so popular? Maybe because moving average is a simple tool, which is easy to understand. You can see moving average on many traders’ screens, so it is something that media like.
When there is a cross on higher time frame like daily or weekly, that is for many people the sign that there might be a change in a sentiment.
Should you buy because there is a golden cross?
Let me ask you another question? What is your trading plan saying about that scenario? If nothing or you do not have a trading plan, you have a problem. That makes you too open for others opinions influence.
Without your own trading plan, you are probably thinking right now: “Hmm, Golden Cross, it should be something good. I buy some stocks.”
Ok, you buy some stocks like many others investors right now. What if this cross is going to fail? When are you going to sell your stocks? You do not know?
The thing is, your trading plan needs to have information about things such as when you buy, when you sell. Some traders are using Golden Cross of 50 and 200 as a market filter. They invest in stocks only when 50 is above 200. With that plan they will never catch dip, but they invest safely.
Of course you need to remember that Golden and Death Cross as signals are not so great. Sometimes it may look like this signals are accurate, but check the whole history on chart. On some times signals occur very, very late. A good example is last Death Cross signal from daily chart of SP500. Vertical line shows where it took place:
Still, you can use them in your trading plan. Lets go back to traders who use Golden and Death Cross as a filter. Now they are probably looking to buy stocks. They have other conditions which need to take place to buy stock. For example lets say that their trading plan sais to look for cross of 12 and 40 moving averages, but only when on index (SP500 or other) 50 average is above 200. Can you spot the logic here?
This way they have better chances that selected stocks will rise. They are using the higher probability that stock will rise. Trader can never be 100% of some setup, but he can use probability in a smart way.
Look at SP500 chart, when 50 was below 200 average. How strong and long falls could be. The chances of success in that enviroment are small (unless you are taking short positions…).
As a Fibonacci trader you also should have a good trading plan which gives you clear answers. The most important thing you need to know is a direction of your trade. Are you looking for short opportunities or long ones?
One look at the chart and you should know – “ok, there is a situation at this stock/currency pair which I can trade at long side. I’m going to look for some good setups here”. When there is a situation, which according to your plan is very risky to trade, then you do not trade. So simple and so complicated at once :).
Having no position is also a good answer. It is easy to lose money, it is harder to earn and protect your profit. That is why your plan should be so good and you should feel good about it. No second thoughts, no others’ influence, just you, market and your trading plan.
The goal of this article is to make a quick reminder, that there will be always some important news – double top, head and shoulders, Death Cross, Golden Cross and so on… But what about your trading plan? Are you going to listen to news and others opinions or stick to your trading plan?
I can think about one guy who had always a plan…
Try to be more like him 🙂
