Money Grows On The Tree Of Patience

In Japan, as in the West, moving averages are used as a valuable trading tool. Some of Japan’s moving averages techniques include golden and dead crosses, the disparity index, and the moving average divergence. As per Japanese traders, it appears that the most popular moving averages are the 5-, 9-, or 25-day averages for shorter term traders, and for longer term traders, the 73-, 26-week or the 75- and 200-day moving averages. However, just as in the West, many Japanese traders have their favorite moving averages.

The Golden Cross and The Dead Cross

The Japanese use dual moving averages in which they compare short and long-term averages. For example, they will compare the 13- week and 26-week moving averages. As shown in Exhibit 5.1, if a shorter term moving average crosses over the longer term moving average, it is viewed as a bullish sign. The Japanese call such a crossover a golden cross. A dead cross is a bearish indication that occurs when a short-term moving average crosses under the longer term moving average.

In Exhibit 5.2, the 26-week moving average is shown as a solid line, and the 13-week moving average as a dashed line. When the shorter term moving average moved under the longer term average in July 1992 it created a bearish dead cross. In November 1992, the 13-week moving average went above the 26-week moving average, thus completing a bullish golden cross. observe how the hanging man session in May 1993 (which, during the next session, became part of a bearish engulfing pattern) hinted at a correction, as did the dead cross a few session earlier.