Enjoy this guest post from Rolf of Tradeciety! Tradeciety is a trading blog created from traders, for traders. Rolf and his team challenge common trading wisdom, debunk trading myths and offer a unique and different view on trading and the financial markets. You can read more from Rolf at Tradeciety.com or stay up to date by following his Twitter account @Tradeciety. Please feel free to contact me if you would like to guest post on MMYW.
Millions of people try to conquer the stock market with the hope of buying the big winning stock that will boost their portfolio and allow them to get closer to a financially independent life faster. However, scientific research shows that the average investor underperforms the market by 1.5% annually. Added to this, less than 1% of all traders can make any profits in the financial markets. Profitable investing for most retail traders seems to be hard work, with a lot of knowledge and research required to be really successful.
But is it really true that trading the markets is difficult?
The fact is that traders really only need a handful of simple but effective strategies to make consistent income trading the markets, without necessarily having to spend time doing lots of research on the background to what is being traded.
The Most Popular Trading Tool
Moving averages are without a doubt the most commonly used trading and investing tool. The reason is that they are very straightforward and the information they provide is not subjective. Best of all, investors don’t have to possess any specific knowledge about how financial markets work in order to read and use them.
The Golden Cross
The ‘Golden Cross’ is one of the most well-known moving average systems. The Golden Cross uses the 50 and the 200 moving average; a moving average is a line on a chart which averages out the price of fifty or two hundred previous price points on any particular time frame. So, for instance, if you are on a Daily chart, the 50 period moving average gives you an indication of the average price at the Daily interval, based on calculations for the previous 50 days; the same goes for the 200 period moving average. The reason that both the 50 and the 200 moving averages are significant is that they are widely used among both professional and retail traders, and even the media frequently talks about both moving averages when the meet up with price. Technical analysis often works as a self-fulfilling prophecy.
The Golden Cross generates a buy signal when the 50 moving average crosses over the 200 to the upside. At this point, price will be sitting above the 50 moving average line. In the illustration below, the Golden Cross occurs at the price 9777; this is your signal to enter the market buying.
A trader will have to close the trade when price closes back below the 50 moving average – as you can see in the illustration below, this would have occurred at the price 13,645 where ‘Exit’ is indicated.
The Golden Cross Performance
| Signals | Success Rate | Return | Annual Return | |
| Dow Jones |
4 |
75% |
18.00% |
2.39% |
| S&P 500 |
4 |
50% |
7.00% |
0.97% |
| DAX |
4 |
25% |
-1.10% |
-0.20% |
| Nikkei |
6 |
33% |
26.40% |
3.40% |
| Gold |
6 |
50% |
15.30% |
2.05% |
| EUR/USD |
5 |
40% |
0.90% |
0.13% |
| Portfolio |
29 |
46% |
66.50% |
8.75% |
Table 1: Performance of the Golden Cross between 2006 and 2013
As the table shows, the Golden Cross system is more successful in some markets than others. It is therefore very important to test the Golden Cross system before you start applying it with your own money. Otherwise, this is a high risk endeavor and more akin to gambling rather than investing.
However, you can see that although the success rate is slightly below 50%, your annual return amounts to 8.75% across different markets and keep in mind that the financial crisis, where markets fell up to 30% in one year, falls into the observation period as well. Thus, the Golden Cross can be an investment method that could generate some decent side income for you.
How To Generate Extra Income Safely With Trading
If you want to learn how to trade and generate some extra income, you have to test your trading ideas with a so called ‘Demo’ account first. Every trading broker offers the possibility to open a demo account where you can trade the real markets with play-money. Especially if you are a new to trading and investing, you should test your trading system on a demo account first before you start investing your real money. If you are new to trading, here are a few more tips on how to generate extra income without risking losing it all:
- Accept that you will not win every trade
- You don’t have to be right all the time to make money
- Don’t trade with money you cannot afford to lose
- Cut your losers early and let winners run
- Adopt a long term perspective and don’t expect to get rich quick
One of the biggest problems most people face is that when time is limited, learning how to trade is the last thing on their minds. The following article will provide you with a step by step instruction about how to become a profitable trader if you still have your regular 9-5 job.
Hello, Rolf and Pauline!
I was playing with the moving average graphs and I noticed that depending on the time range I look at, the moving average line changes. I understand it, but my question is: what time range should I look at?
Does it influence the strategy?
How can I read the different time ranges and use them to successfully buy and sell?
I am a bit confuse.
Thank you!
Daniel @ SaveWithDan.ca recently posted…How to change providers
Hello Daniel,
yes, depending on which timeframe you choose, the lines change because the underlying data changes.
There is no real answer to what the best method or approach is. In the end it comes down to what you feel most comfortable with and where you can see the biggest benefit for you. I would suggest, you keep trying and evaluate your performance to see what works best.
Rolf