Understanding the Golden Cross in Trading
A golden cross occurs when a faster-moving average crosses above a slower-moving average on a trading chart.
The most commonly used moving average settings for traders are the 50-day and 200-day moving averages.
Formation of a Golden Cross on a Trading Chart
A golden cross is formed in the typical scenario when the faster-moving average crosses above the slower-moving average.
The 50-day moving average crossing above the 200-day moving average is a widely recognized golden cross formation.
While other combinations, such as the 5-day and 15-day averages, can create golden crosses, longer periods are often considered more reliable and provide stronger signals for assets, stocks, or cryptocurrencies.
A golden cross formation consists of three stages:
- The first stage marks the end of a downtrend as the gap between the 50-day and 200-day moving averages starts to decrease.
- The second stage is the golden cross formation, when the 50-day moving average crosses above the 200-day moving average.
- The third stage represents the subsequent uptrend that follows the golden cross formation, providing an opportunity for traders to enter the market and potentially benefit from the upward movement.
Traders often view the golden cross as a definitive signal of a bull market and a strong buying signal.
However, it is important to note that experienced traders do not rely solely on the golden cross as a trading signal but incorporate it as part of a comprehensive trading system.
Reliability of the Golden Cross Indicator
The reliability of the golden cross indicator can be a subject of debate among financial analysts.
Nevertheless, it has performed well in recent times.
Golden Cross Trading Strategy
The most commonly used and safe trading strategy involving the golden cross is to enter the market when the golden cross is formed.
Some traders may even enter the market as the moving averages start to move in the direction that leads to the formation of the golden cross, aiming to gain an advantage by entering early.
For short-term traders focusing on shorter time frames, such as 1-hour charts, it is advisable to use a shorter moving average, such as the 100-day moving average, instead of the 200-day moving average.
The Golden Cross and Beyond
Many traders combine the golden cross with other technical indicators to gain a broader understanding of price and volume activity before making buying or selling decisions.
These additional indicators can include the moving average convergence divergence (MACD), on-balance volume (OBV), accumulation/distribution indicator, relative strength index (RSI), and stochastic oscillator, among others.