Golden Cross Explained

It hasn’t been long since traders and investors in the crypto market started using technical analysis as a tool to maximize profits. There are several terms associated with the technical indicator called the moving average or MA, one of which is the Golden cross. 

Let’s explore more about the golden cross and what it tells us about a market.

Definition of Golden Cross

Source: TradingView

A golden cross is a technical chart pattern that indicates the potential for a major rally, i.e., a bullish breakout pattern that is formed by the crossover of a security’s short-term MA that breaks above its long-term MA or resistance level.

Since long-term indicators carry more value, the golden cross pattern indicates an impending bull market that is bolstered by high volumes of trading. It can be distinguished with a death cross which designates a bearish price movement.

What Does a Golden Cross Tell Us?

A golden cross comes in three stages:

  1. First Stage – This stage involves a downward trend that ultimately bottoms out as the selling is exhausted.
  2. Second Stage – The second stage requires a crossover between the shorter moving average over the larger moving average in order to trigger a breakout and confirm a reversal trend.
  3. Third Stage – The last and final stage involves the continuation of an upward trend that follows through with the higher prices.

The moving averages play the part of support levels on pullbacks till they crossover back down, after which a death cross may form. Death crosses are the absolute opposite of golden crosses since here, the shorter moving average crosses down, the longer one.

The most frequently used moving averages are the 50-period (shorter) and the 200-period (longer) moving average. The periods tell us the particular time increments. Usually, longer time intervals tend to form stronger and lasting breakouts, like the S&P 500 period crossovers, which is one of the most prominent bullish market signals.

Day traders commonly use smaller time periods such as 5-period and 15-period moving averages to trade golden cross breakouts within the day. Also, the time intervals in the charts can be adjusted from one minute to weeks or even months. Similar to longer periods making stronger signals, the same goes for chart time intervals as well. The longer the chart time interval, the stronger and lasting the golden cross breakout tends to be.

Are Golden Crosses Reliable Indicators of Long-Term Bull Market?

A golden cross is seen after a rise in the market, but since it is a lagging indicator, it’s difficult to know when there is a false signal until after the fact. Traders generally use a golden cross as a proof of a signal or trend in alliance with other such indicators.

Difference Between Golden Cross & Death Cross

Source: Trading In Depth

A golden cross and a death cross can be differentiated easily since they’re polar opposites; one’s an indicator of a long-term bull market while the other indicates a long-term bear market. Both indicators refer to the pertinent formation of a long-term trend by the crossover of a short-term moving average over a long-term one.

Analysts and traders interpret the golden cross as a definitive signal of an uptrend in a market. In contrast, death crosses are considered to be a decisive signal of a downtrend in the market. Either of them is understood to be more significant when combined with high trading volume.

The Limitations of Using Golden Crosses

Source: Binance Academy

All the technical indicators are ‘lagging,’ and no indicator truly predicts the future of a market perfectly. There are many occasions where a golden cross has produced a false signal. Golden crosses are still subject to failure despite its strong predictive ability in speculating prior long bull markets.

Therefore, you should always confirm a golden cross with other indicators and signals before committing to a trade. The secret to using the golden cross indicator correctly along with other filters and indicators is always to use ratios and risk parameters. This way, you get to time your trade properly by keeping a favourable risk-to-reward ratio, which leads to better results than just blindly following a golden cross.

Identifying a Golden Cross

Source: Corporate Finance Institute

Golden crosses occur when short-term moving averages cross over long-term ones to the upward direction that traders and analysts interpret as a positive uptrend in the market. 

Some interpreters consider them a crossover between a 100-day moving average and the 50-day one, whereas others may define it as a 200-day moving average crossover by a 50-day moving average. 

Essentially, the short-term moving average tends to move upwards faster than the long-term moving average until they cross.

Conclusion

A golden cross is a powerful and useful trade indicator, but that doesn’t mean you should buy in on every cross you see in the charts. You’ll need to research and learn a lot more to understand the level of sophistication and complexity that goes into successfully predicting and making profits from technical indicators of a market.

Learn more about reading crypto charts here.

Learn more about bitcoin death cross here.

The post Golden Cross Explained appeared first on WazirX Blog.

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