The most important aspect of trading is identifying the right long-term trend. Once that’s done, the remaining steps aren’t too difficult as a trader only needs to look for buying opportunities in an uptrend and selling opportunities in a downtrend.

In fact, many traders complicate the process by waiting for lower levels to buy in a bull market and missing out on much of the rally. Then when the trend reverses and the price begins to fall, these traders start buying, often leading to losses.

To avoid this trap, traders can use signals generated by the major moving averages to better measure market momentum and trend direction. In last week’s article we looked at the Death Cross, and this week we’re going to be looking at the Golden Cross pattern. This setup can help traders avoid buying on a downtrend and provides a good signal to start buying when the trend is up.

Let’s learn this pattern and how to use it for trading.

What is the Golden Cross and how is it made?

The golden cross is a setup that signals a possible change in a downtrend. It is formed when a faster moving average, usually the 50-day SMA, crosses the longer-term moving average, usually the 200-day SMA.

BTC / USD daily chart | Source: TradingView

In a downtrend, both the 50-day SMA and the 200-day SMA are sloping. However, when the price hits an attractive valuation, long-term investors begin to accumulate, which slows the decline. As more investors start buying, an upward trend can begin.

A sustained upward move will help the 50-day SMA switch from a downward to an upward trend. However, the 200-day SMA is slower to react, so when the 50-day SMA goes down or flattens out, it rises above it and forms a gold cross.

This is a sign that the downtrend is over and a new uptrend may have started.

However, like any other setup, the golden cross is not a perfect indicator. There are false signals many times, but the filter allows traders to reduce it a little.

A useful golden cross

BTC / USD daily chart | Source: TradingView

Bitcoin (BTC) bottomed at $ 3,858 on March 13, 2020, and the final Golden Cross was formed on May 21, 2020 when the price closed at $ 9,061.96. That said, the BTC / USD pair rose 134% as the Golden Cross confirmed the turnaround.

Inexperienced traders may feel that the price has risen too quickly and would wait for a deep correction to buy. However, when a trend changes it rarely presents an opportunity to buy at lower levels as it does.

The rally has continued and Bitcoin hit an all-time high of $ 64,899 on April 14, 2021, a whopping 616% increase over the founding of the Golden Cross. This shows that merchants who bought and held after the formation of the Golden Cross would make huge profits.

However, not all Golden Crosses offer such excellent returns and traders sometimes fall prey to them.

A failed golden cross

Bitcoin fell from a local high of $ 13,868.44 on June 26, 2019 to a local low of $ 6,430 on December 18, 2019. A gold cross was formed on February 18, 2020 when the pair closed at $ 10,188.04.

BTC / USD daily chart | Source: TradingView

However, traders who bought after the Golden Cross was formed suffered heavy losses as the pair fell $ 3,858 just days later. This shows that traders can lose money just buying while forming the Golden Cross.

Filters to prevent the Golden Cross from generating false signals

Traders can avoid buying if a gold cross is formed while the 200-day SMA is still sloping down. You can wait for the 200-day SMA to either flatten or rise before buying as it could dampen the swing.

EOS / USD daily chart | Source: TradingView

For example, EOS formed a Golden Cross on February 8, 2020 when the price was $ 4.76. Price invalidated the filter because the 200-day SMA is flat. However, if traders execute a buy order it will be a losing business as the EOS / USDT pair peaks at $ 5.49 on February 17, 2020 and then crashes to $ 1.35 on March 13, 2020.

The second Golden Cross was created on August 22, 2020, the price did not invalidate the filter as the 200-day SMA sloped down as the pattern formed. This will prevent the bulls from getting drawn into this trade.

The third Golden Cross was created on December 12th, 2020, the price has the filter turned off, but it will hit a stop loss if the price breaks the strong support at $ 2.20 on December 23rd, 2020. , the fourth Golden Cross was formed on February 8th. 2021, and traders doing this trade will be profitable.

The example above shows that the Golden Cross won’t work as an ideal indicator when the price is stuck in a range. Therefore, traders should only enter into trades when the price breaks out of the range.

When the cryptocurrency is in a downtrend, traders can wait for a gold cross to form before taking a long position. This can save traders from trouble in a bear market.

After maintaining the Golden Cross and confirming a new uptrend, traders can look for buying opportunities.

Important things

A gold cross can confirm that a downtrend has ended and a new uptrend may have started. Until the Golden Cross is formed, long-term investors should not buy as this could result in losses.

But like any other model, the Golden Cross isn’t perfect either. It can lead to a losing deal if the coin enters a consolidation phase while it is bottoming out. Hence, traders need to take precautions to avoid being drawn into the bull trap.

Once an uptrend is established after the Golden Cross, traders can look for buying opportunities and stay in trend until a reversal signal occurs.

Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions.

SN_Nour

According to Cointelegraph

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