Trading Treasuries: What Is The Cradle Trade?

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 (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.

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