What is the Cradle Trade?

Mar 18, 2009: 9:52 AM CST

A few readers have been asking me to explain the “Cradle Trade” Concept with an example and I wanted to take the time to do that in this post.

The “Cradle” has become my favorite trade, and it is one that I discovered through repeated observation.  I’m sure others have figured out the same thing, but I’ve never seen a name given to this concept or trade set-up, so I began pointing it out and asked readers to come up with a name for it.  Some were creative, but the name “Cradle Cross” stuck which I shortened to the “Cradle.”

The Logic is the following:

Let’s assume price is in an uptrend and then price breaks beneath the 20 EMA then also breaks beneath the 50 EMA (exponential moving averages).  Eventually, the 20 EMA (shorter) will cross under the 50 EMA (longer), which will occur at an exact point.  This is the “Cross-over.”

Price moves in a wave-like structure, so if price swings back up to test this exact point, then this sets up the “Cradle Trade,” as price is said to have “come back into the cradle crossover zone.”  The trade is to get short as close to the cross-over price as possible and place a tight stop just beyond the confluence created by the EMAs.  The risk/reward is favorable, as the EMAs are expected to hold as resistance, and if they don’t, then the stop is small relative to the downside target if it is achieved.

The term “Cradle Trade” sums that up in a visual concept.

The main “Cradle” Trade occurred at 1:00pm in the TLT.  Price broke the 20 and 50 EMAs, those EMAs ‘crossed bearishly,’ and then price rallied up into the confluence resistance created by the crossover price at $101.60.  We expect EMAs to hold as support and resistance, and the logic is when both EMAs come together, that should be a confluence resistance area.

And if the ‘cradle’ doesn’t hold (price runs through it), then we have a stop just beyond (though, of course more than a few ticks) the crossover.  You can play for whatever downside target you feel appropriate.

Notice at the end of the chart, a New Cradle has formed as the 20 crossed back above the 50 EMA.

There are subtle nuances to this trade set-up that I won’t share publicly, but hopefully this gives a basic overview of the concept that is becoming one of my favorite trade set-ups at the moment.

For more examples, type “Cradle” or “Cradle Trade” into the blog’s search bar.

Corey Rosenbloom
Afraid to Trade.com

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9 Comments

9 Responses to “What is the Cradle Trade?”

  1. Anonymous Says:

    Thanks for posting this article…. I cant believe how fast you got this post up here.. I literally just sent you a email on this a couple of hours ago…..

    Sean K

  2. Corey Rosenbloom Says:

    Sean,

    Thanks! I’ve been meaning to do it for a few weeks now – I just used your email as an excuse to actually do it. I had two comments last night and your email so I decided “I’m really overdue for this post!”

    Thanks for your support.

  3. matt Says:

    Corey,

    Curious if you’ve done any testing on the EMA parameters? Any particular reason you settled on 20 and 50?

  4. Corey Rosenbloom Says:

    Matt,

    There’s nothing inherently special about 20 and 50, though I’ve tried all sorts of combinations, there were the ones I settled on because they seemed to do what I expected them to do (hold as support/resistance) enough times to keep me satisfied. 20 is short-term, 50 is intermediate. I think – in part – they work because so many people watch them.

    I believe that we have to try out as many indicators as we can (and combinations) but then settle and begin to train our eye. There’s no fun in jumping around all the time using all sorts of different indicators. You’ll learn the nuances of the parameters you’ve chosen.

  5. Anonymous Says:

    Thanks Corey for the post. Very informative.

  6. Anonymous Says:

    Corey,

    Do you look for specific candles for entry points? Can you post a few trades you have taken based on this setup – entry and if possible exits?

  7. Corey Rosenbloom Says:

    Anon,

    I try to have as much going in my favor as possible, so yes, I’ll be more confident if there’s a candle pattern such as a doji or an evening star as price finds resistance at the cradle.

    I didn’t know there was this much interest in this trade set-up! Of course – I’ll try to provide more examples. Thanks!

  8. Richie Says:

    I notice most of your examples are in 5 min charts.
    Partly due to overtrading and partly due to your website examples, I’ve recently switched over to focusing on 5min charts over the 1min charts I had been trading off of.
    Haven’t completely weaned off but I have traded less and better, though I still can’t help but peek at the 1min.
    It’s a bit of a “drug” habit I guess.
    If you don’t mind, I’m wondering if you have found the 5min chart to be the best time period to day trade off of.

    Thanks, Richie

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