What is a Golden Cross in Stocks and Crypto – Its Three Stages, Examples & Use
The golden cross refers to the point where the shorter moving average cuts the long moving average while moving upwards. The golden cross signals investors and agents that the market is now transitioning to a bullish trend. Often, the golden cross formation is viewed as a good buying opportunity.
Investors need to know what is a golden cross if they plan on making regular investments in the stock market. The guide will help you understand the golden cross technical analysis and how the metric can be effectively used in making investment decisions. Read on!
What is a Golden Cross?
The golden cross depicts a point where the short-term moving average exceeds the long-term moving average, generally indicating an upward trend. The term is a technical way to denote the intersection of the 50-day and the 200-day averages.
The golden cross is a strong indicator of a bull market and is treated as a signal for buying stocks. If you plan to invest in security, you must check for the golden cross stock movement to understand if the market is favourable for a purchase.
What is a Golden Cross in Stocks and Crypto?
The golden cross is a pattern depicted via stock charts where the 50-day moving average crosses the 200-day moving average, showcasing an upward trend in the market. The golden cross stock movement has three distinct stages:
- The phase where the short-term moving average of a stock is lower than the long-term moving average.
- The phase where the short-term moving average tends to increase and crosses the long-term moving average of the stock.
- The phase where the short-term moving average starts going up, denoting an upward trend in the market.
Before investing in stocks or crypto, you must look for a golden cross. While a golden cross may occur during a short time frame, you must look for the indicator in charts that showcase long-term performance to ensure the indicator’s accuracy.
This is because the golden cross’s technical analysis is highly relevant in the case of charts that depict performance for a long-time frame.
How to Use the Golden Cross?
If you are an active investor, you must know the basics of golden cross trading and how you can use a golden cross.
Investors and traders use the indicator to understand the performance of the market and when they should enter or exit a particular market. It is also an indicator of when to buy and hold the stocks.
The golden cross shows the traders the point at which the prices of the security increase above the 200-day moving average. The indicator can be actively used by traders who want to understand when a bear market ceases to exist and by when they should exit their positions. While most traders use a 50-day moving average and a 200-day average to locate the golden cross, some choose to replace the 50-day moving average with the 100-day moving average.
The investors also use several other indicators to confirm the existence of the golden cross. While a golden cross is a lagging indicator, investors can use momentum indicators like the Average Directional Index and the Relative Strength Index to identify or predict a golden cross just in time.
Three Stages of a Golden Cross
The golden cross goes through three distinct phases, as discussed above. You must understand the prevailing trends during each phase to make trading decisions.
Phase 1
During the first phase, the market sees a downward trend, but the trend will change in a few days; hence, the investors’ selling intentions are changing to buying intentions.
Phase 2
During the second phase, the investors see the beginning of an upward trend in the market. Here, the short-term moving average exceeds the long-term moving average. The point where the line depicting the short-term moving average cuts the line depicting the moving average and moves upwards is called the golden cross.
Phase 3
Post the second phase, the trend keeps going upward and indicates a current bullish market. A bull market remains in the picture until the 50-day average, and the price remains above the long-term moving average line.
Golden Cross Examples
To understand a golden cross, you need to have an in-depth understanding of the indicator. An example will help you understand the indicator better.
Here, the golden cross is the point where the 50-day moving average cuts the 200-day moving average. It marks the begging of a bullish market. Similarly, the chart below shows another golden cross.
Here, the presence of the golden cross is showcased in a long-term chart showing the stock price movement throughout the year.
How Does Golden Cross Trading Strategy Work?
There are different strategies that you can use involving the golden cross. Let’s look at some strategies that can help you improve your trading performance.
- All golden crosses do not represent a similar setup. Hence, if you observe a golden cross for a stock that has shown a downward trend for a long time, you should wait for the stock to move higher before you make the purchase. You need to allow a basing period for the market to transition from a long bearish trend to a bullish trend.
- You must avoid a wide spread between the two moving averages. You can identify the spread when there is a cup and handle-like formation on the charts. The pattern indicates a bullish market; however, the price shoots up and starts forming a parabola that will ultimately reverse the trend. Hence, you should treat these reversals carefully and avoid buying stocks if this type of golden cross exists.
- You can combine the double-bottom chart formation with the golden cross. Identify the first double bottom and the second one on the chart. Between these two double bottoms, a golden cross might form. Once the price retests the 200 SMA, you can buy the stock.
What is the Success Rate of Golden Cross Signals?
In the world of stock trading, there is no guarantee of success. Several factors influence the price of a stock. And even if you depend on historical data and indicators like the golden cross, there is a good chance what you predict may not come true.
Also, your experience as a trader, knowledge and understanding of stocks play a vital role in determining the success you achieve when using indicators. Often, the formation of a golden cross has resulted in the upward movement of a stock’s price. But there are also incidents when the uptrend did not take place.
Drawbacks of Golden Cross
A golden cross is a lagging indicator; hence, it cannot prove the future correctly. There have been cases where the golden cross has given a false signal to the market about its movements to a bull market. While the indicator is widely used to foresee market transitions, it has often failed to give correct predictions.
Importantly, you cannot study a golden cross in isolation. It would help if you coupled this indicator with other signals to make a trade decision. An investor should deploy additional investment tools to get a clear market overview.
Difference Between a Golden Cross and a Death Cross
Golden cross and Death Cross are both used during the technical analysis of stocks. Let’s read about their differences.
In both cases, one moving average crosses another from above or below, but the death cross is the opposite of a golden cross. During a death cross, the 50-day moving average crosses the 200-day moving average from above and moves downwards.
Hence, a death cross depicts a bearish movement in the market. The long-term moving average acts as primary support in the case of a golden cross and as resistance in the case of a Death Cross. Both indicators confirm a prevalence of a long-term trend and use short-term moving averages to depict the same.
Final Words
The golden cross is one of the strongest indicators that show if the market is turning bullish. While there are a few limitations of the golden cross, the benefits of the indicator outweigh the limitations, and it is a widely used signal by day and swing traders. Even regular investors use the signal to understand whether they should buy or sell a stock.
FAQs
Ans: A golden cross suggests that bulls may be overtaking the markets, while a Death Cross shows a downward trend depicting a bear market.
Ans: In a golden cross, the third phase shows a continuing uptrend in the stock price. The phase comes as soon as the golden cross is formed.
Ans: While you can use the golden cross for analysing several timeframes, most investors or day traders use the indicator for analysing short time frames, like 5 or 10 minutes. However, swing traders use the indicator for time frames that span 5 to 10 hours.
Ans: The golden cross EMA considers the exponential moving average to calculate the weighted movement of the prices. It shows the point where the 50 EMA exceeds the 200 SMA.
Ans: A golden cross works similarly in both stocks and cryptocurrency. Here too, it shows an upward trend in the market and acts as an indication to buy.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
