PremiumTrading has witnessed a huge spike in the past couple of years. Trading platforms are offering features to use technical indicators as screeners to narrow down trading opportunities. This behavioral shift led to an important question, how good are these technical indicators when it comes to outperforming the index or how did they fare in comparison to the index performance?
A lot of traders and investors rely on technical indicators to make buy or sell decisions. Due to the popularity of technical indicators, many analysts also use technical indicators in their analysis to give Buy and Sell calls.
Unlike fundamental analysis, where we evaluate a company’s business, results, management team, etc, in the technical analysis we study price and volume data to make buy/sell decisions.
In this article, let's look at the backtesting of one of the most popular indicators people use, the golden cross.
Golden cross indicator uses two moving averages timeframes, one long-term, and another short-term.
A moving average is one that simply averages the closing price of a stock from the current day all the way back to the specified number of days. The goal of a moving average is to smooth out changes in the price of a stock over a specified period.
Due to its simplicity, it is one of the most popular indicators used by swing investors and traders to enter and exit positions.
In the figure below, the short-term moving average is shown in blue and the longer-term moving average is shown in white.
A buy signal is generated when the short-term moving average crosses the long-term moving average from below.
A sell signal is generated when the short-term moving average comes below the long-term moving average.