Golden Cross

November 21, 2023 - Around 3 mins mins to read

Understanding the Golden Cross

A Golden Cross is a phenomenon in trading where a faster moving average crosses a slower moving average. Traders commonly use the 50-day moving average and the 200-day moving average as their preferred settings.

Formation of a Golden Cross in a Trading Chart

In order for a Golden Cross to form on a trading chart, the faster moving average must cross the slower moving average from below. While a combination of shorter moving averages can also create Golden Crosses, longer periods tend to be more reliable and provide stronger signals for assets, stocks, or cryptocurrencies.

A Golden Cross can be observed in three major stages:

The first stage marks the end of a downtrend as the gap between the 50-day moving average and the 200-day moving average starts to decrease.
The second stage occurs when the 50-day moving average crosses the 200-day moving average, forming a Golden Cross.
The third and final stage is the uptrend that follows the appearance of the Golden Cross. This is an opportune moment to enter the market and maximize potential gains as the uptrend continues.

Observe how the graph initially moves horizontally when the 200-day moving average (purple line) is above the 50-day moving average (yellow line). However, when the yellow line crosses the purple line in an upward direction, a Golden Cross is formed and the price experiences a significant increase.

A Golden Cross is widely regarded as a definitive signal of a bull market and a strong buying signal for many traders. However, experienced traders advise against relying solely on the Golden Cross as a trading signal and instead recommend incorporating it into a comprehensive trading system.

Reliability of the Golden Cross Indicator

While financial analysts may hold differing opinions, the Golden Cross indicator has demonstrated remarkable performance in recent times. For example, the S&P index increased by over 50% after the last Golden Cross appeared on its trading charts.

The Golden Cross Trading Strategy

The most commonly used and safe trading strategy involves entering the market when a Golden Cross is formed. However, some traders prefer to enter the market as soon as the moving averages begin to move in a direction that suggests a Golden Cross formation, allowing them to gain an advantage by entering the market early.

For short-term traders, it is advisable to use the 100-day moving average instead of the 200-day moving average. This strategy is particularly effective for shorter time frames, such as 1-hour charts.

Many traders combine the Golden Cross with various technical indicators to gain a comprehensive understanding of price and volume activity before making buying or selling decisions. These technical indicators may include moving average convergence divergence (MACD), on-balance volume (OBV), accumulation/distribution indicator, relative strength index (RSI), and the stochastic oscillator.

Glossary

Golden Cross

Understanding the Golden Cross

Formation of a Golden Cross in a Trading Chart

A Golden Cross can be observed in three major stages:

The first stage marks the end of a downtrend as the gap between the 50-day moving average and the 200-day moving average starts to decrease.
The second stage occurs when the 50-day moving average crosses the 200-day moving average, forming a Golden Cross.
The third and final stage is the uptrend that follows the appearance of the Golden Cross. This is an opportune moment to enter the market and maximize potential gains as the uptrend continues.