Golden Cross

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21 Aug, 2024

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The golden cross in stocks is a technical analysis indicator that forms when the shorter moving average crosses above the longer moving average from below. It is used by forex traders who view it as a bullish signal by the market. The longer moving average becomes the support level in the new rising market.

A golden cross develops when short-term up movement is faster than long-term. This signals to purchase. It is a technical analysis pattern in which two moving averages intersect, suggesting that the reference currency will move in the same direction. Increasing volume at this crossover point for stocks confirms an upward breakout move.

Golden Cross Meaning

A death cross, a negative market movement, can be compared with a golden cross, which indicates an upward price movement.
It occurs when short-term up movement is faster than long-term. This signals to purchase. Traders who sell short the market may use the golden cross as a signal that the bear market is over and it's time to exit their positions.
Golden Cross is often a significantly lagging indicator. It may not occur until the market has turned from bearish to bullish.

Golden Cross Trading Explained

A golden cross trading strategy indicates an upward stock price movement. It is unlike a death cross, which shows a negative market movement.

The 50/100-day moving averages are typical for stocks. However, foreign currencies moving averages would depend on the time horizons chosen by the forex trader and may be in hours or days.

Traders looking to buy security will sometimes enter the market when the security's price rises above the 200-day moving average rather than waiting for the 50-day moving average to make the crossover. This is because it is often a significantly lagging indicator. As a result, it may not occur until the bearish market has turned bullish.

Traders who sell short the market may use it as a trade signal that the bear market is over and it’s time to exit their positions.

Many investors view the Golden Cross as a “holy grail” chart pattern. They consider it one of the most definitive signals of a bull market and, therefore, a strong buy signal.

Spotting Golden Cross

To find it, technical analysts plot two moving averages of a stock or other asset's price -- a short-term average and a long-term average. A golden cross intersection is when a short-term average is below the long-term average, but at some point, it cuts the graph and becomes higher. Analysts looking for this pattern consider a positive golden cross to signal that the stock or other asset's price is headed higher.

To calculate it, use a 50-day to a 200-day moving average. It is interpreted to mean that a stock is going up. If an investment's performance lags, the 50-day and the 200-day averages should stay about the same distance. However, if the 50-day average picks up and crosses the longer-term average, it's a sign that the investment's price has started to increase and that there could be further upward momentum.

It is only spotted after the market has climbed; hence it is dependable. Due to the latency, it's hard to tell if a signal is incorrect until after the event. Traders combine this concept with additional indicators to validate a trend or indication.

Chart And Interpretation

Traders can take a look at the Bitcoin/US Dollar chart below to better understand the concept of a golden cross.

Source

In the above chart, the pink line denotes the 200-day moving average. On the other hand, the blue line is the 50-day moving average. One can observe that on February 20, 2018, the 50-day moving average line crosses the 200-day moving average from below, leading to the formation of the golden cross pattern. The green circle in the chart at the crossover represents the pattern. The pattern indicates a bull market, and as we can observe, the price goes into an uptrend following its formation.

If individuals wish to see similar charts that show the formation of the golden cross pattern, they can visit the TradingView platform. Observing similar charts can help people develop a comprehensive understanding of the concept.

Example

Let us look at the following golden cross example to understand the concept better:

An article by Business Insider explains how it can be used for cryptocurrency trading. Some experts suggest redefining the short- and long-term. For example, if the 50-day average crosses the 200-day average, compare a 10-day average to the 50- and 200-day averages. The 10-day average sometimes signals a death cross. You should avoid taking long positions and 'fakeouts.'

The article highlights how some experts advise not using traditional wisdom to watch the crypto market, although traders use it. For example, many bitcoin traders utilize both; the golden and death intersection technique for long-term investments – an ancient stock market approach. It develops when short-term up movement is faster than long-term. This crypto golden cross signals to purchase.

Golden Cross vs Death Cross

The death cross and golden cross are technical phrases for when one moving average (MA) meets another from above or below.

There is a second converse indicator – the Death Cross – which is the inverse of the concept in the discussion. The Death Cross occurs when a security's 50-day moving average crosses from above to below its 200-day moving average. The Death Cross indicates a bear market going forward.

After the crossing, the long-term moving average represents key support (in the case of the golden cross) or resistance level (in the case of the death cross) for the market. Either cross may suggest a trend shift, but they usually corroborate an existing trend change. A death cross, a negative market movement, can be compared with a golden cross, which indicates an upward price movement.

Frequently Asked Questions (FAQs)

What does the golden cross mean in stocks?

A golden cross strategy is a fundamental chart pattern that indicates the possibility of a significant rise. The concept shows on the chart when a stock's short-term moving average crosses over its long-term moving average. This concept contrasts with the death cross, which indicates a downward price trend.

Is Golden cross a good indicator?

The golden cross is a positive momentum indicator that occurs when a security's short-term price moving average exceeds its long-term moving average. A death cross is the inverse of the concept in the discussion, indicating when the short-term price moving average falls below the long-term moving average. Using numerous trade conditions after the crossing increases the good trading likelihood.

Is Golden cross SMA or EMA?

Some traders use simple moving averages to trade the Golden Cross. Others may employ exponential moving averages. Some traders prefer the exponential average because it responds more quickly to price changes.

Does Golden Cross work?

It occurs when a short-term moving average crosses over a long-term moving average. Hence, it is a reliable, positive price trend in all financial markets. The same is also applicable to the cryptocurrency market.