A bullish cross happens when a faster moving average crosses above a slower moving average.
That is the simple answer.
Moving averages are very useful to help traders gauge the trend of a stock. Some very popular moving average include the 50 MA and 200 MA.
For example, when a stock is above its rising 50 MA, it is considered to be in a bullish environment.
The beauty of using moving averages happens when you learn to combine two moving averages to get a bullish signal.
A faster moving average is a moving average that is more sensitive. Usually the period will be less than 20. A faster moving average can give an early signal. This enables the trader to be able to take action faster.
However, it has a downside. Faster moving averages tend to have more whipsaws.
A slower moving average is a moving average that is less sensitive. It usually involves periods longer than 20. This makes the signal given slower but it helps to reduce whipsaws.
Examples of slower moving averages are 50 MA, 100 MA or 200 MA.
A bullish cross uses two moving averages. A faster one and a slower one.
The picture of a bullish environment happens when:
Therefore, when the faster moving average moves above the slower moving average, it can often give us an early signal of a potential new bullish uptrend.
Let's take a look at an example below.
The chart above shows the daily chart of SPY with the 20 MA (red) and 50 MA (blue). The 20 MA is the faster MA since the period is smaller. Notice how it is more sensitive than the 50 MA.
Prior to mid November 2016, the 50 MA was above the 20 MA. This was a bearish environment. Then the SPY experienced a bullish cross where the 20 MA went back above the 50 MA. We call this a bullish cross.
Notice how the SPY had a nice bullish uptrend after the bullish cross.
The above is the same daily chart of SPY but this time I have put in the 5 MA (pink) and the 30 MA (green). Notice how the bullish cross happen slightly earlier than the bullish cross that had the 20 MA and 50 MA.
When you use shorter periods, the signals given can be faster but they are more prone to whipsaws. Therefore, one should consider this factor when finding the best combinations.
There is no one size fits all answer to this question.
I like to use the 20 MA and 50 MA combination. Some may prefer to use the 5 MA and 30 MA and some others might like a 10 MA with the 20 MA. It all depends on your style of trading.
If you are a short term trader then you might want to consider shorter periods. On the other hand if you are a longer term trader, your choice will be longer periods.
Once you have selected your preferred MAs, you should learn all about it by noticing when the signal works and when it does not work that well.
One of the best uses of a bullish cross is to help the trader notice the beginnings of a trend change.
If a stock has been in a downtrend, the faster MA will be below the slower MA. A bullish cross will change that position. The faster MA will cross back above the slower MA and this is very easy to see.
The chart above shows how EL had been trading below its 50 MA and 20 MA. The faster MA is also below the slower MA. In January 2017, the 20 MA cross back above the 50 MA and the stock also trades back above these 2 MAs marking a change in trend.
The bullish cross is quite easy to see and it really does help the trader or investor to spot a significant trend change in the stock.
Bullish crosses can also be used for trading. Some systems employ the bullish crosses as a buy signal. I do not recommend you to enter a stock purely using a bullish cross.
Instead you should combine the bullish cross with chart patterns to give you a potent trade signal. That way, you reduce whipsaws as well as increase your winning percentage.
In the example above, we can see how ESRX had a bullish cross in late November 2017. This bullish cross was accompanied by an ascending triangle breakout. The trader can buy the breakout with more confidence knowing that a bullish chart pattern has appeared and a bullish cross has appeared.
This gives us more confidence in taking the trade.
Bullish crosses do not only exist in daily charts. In fact you can switch between different time frames and still notice the benefits of using a bullish cross.
Bullish crosses can aid you in multiple time frames and that includes 5 min time frames, 15 min time frames, hourly time frames or any time frame that you choose. You just need to familiarize with when and where the signals works best in that particular time frame.
The chart of FAST above shows an hourly bullish cross. This marked the beginning of a new 60 min uptrend after a downtrend. The bullish cross was also accompanied by a gap up that help to propel FAST higher.
The chart above shows the 5 min chart of SPY. Notice how the 5 min bullish cross help to pinpoint the start of a new 5 min uptrend. After the appearance of the bullish cross, SPY had a breakout above a consolidation and this gave traders a nice intraday run up that extended to the next trading day.
Now that you have learnt about the bullish cross do put it into your arsenal of trading tools as they are simple yet powerful technical indicators.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
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