What is a Golden Cross and How to Use It

trading, analysis, forex

If you are a currency trader, then chances are high that you know the meaning of a golden cross. But it is also likely that you have never used it. This is the case with a majority of investors and currency traders.

The golden cross is one of those useful strategies that don’t get a lot of attention from market analysts. But if applied in the right way, the golden cross can be a great indicator of a shift in forex market trends.

What is a Golden Cross?

A golden cross can be described as a bullish technical formation that usually supports an upward momentum in a current trend or a possible turnaround in a trending down market. It is a bullish breakout pattern resulting from a crossover involving a short-term moving average of security. Whenever the long-term indicators have more weight, the golden cross shows a bull market approaching and is reinforced by high trading volumes.

For a trader to use a golden cross, they need to identify signal lines rising above the longer-term element or a shorter-term moving average. As the existing shorter-term prices increase, the shorter-term element naturally rises above-average prices.

The opposite of a golden cross is a converse indicator also known as a death cross. The death cross happens when the 50-day moving average of security passes from above to below its two hundred-day moving average. The death cross is an indication of a bear market moving forward.

The Three Stages of a Golden Cross

There are three main stages of a golden cross. The first stage occurs when there’s a downtrend that is on its last legs as a result of stronger buying interest overpowering selling interest. The second stage is where a new uptrend emerges. The breakout of a new uptrend is evidenced when the short-term average passes from below to above the long-term average, leading to the formation of a golden cross.

The third and final phase is where the new uptrend is extended with continuous gains that signal the start of a bull market. At this stage, the two moving averages of the golden cross both serve as support levels. Provided both the 50-day average and price remain over the 200-day average, the bull market is considered intact.

What does a Golden Cross indicate?

As mentioned earlier, a golden cross happens when a short-term moving average passes over a major long-term average. It is normally interpreted by traders and analysts as a sign of a definitive upward turn in the market. Golden cross basically shows a long-term and persistent bull market.

How to use the golden cross

As a trader, you can take advantage of the golden cross to determine which is the best time to enter or exit the market. Besides, the indicator can be a great tool for traders who want to better understand when it makes more sense to buy, sell or hold their stock.

Traders considering purchasing security will often enter the market when the price of the security increases above the 200-day moving average instead of waiting for the 50-day moving average to crossover. This is probably because the golden cross is usually a lagging indicator. They may not take place until after the market has already shifted from bearish to bullish. Traders or investors who short sell short the market can use the golden cross as a sign to show them that the bearish market has come to an end and a time to exit their positions has come.

The golden cross is normally used in trading both individual securities as well as market indices like the Dow Jones Industrial Average.

Some traders may choose to use various moving averages to show a golden cross. For instance, a trade can decide to replace the 100-day moving average with the 200-day moving average. This pattern can also be used on shorter time frames like hourly charts.

Last but not least, most analysts use complementary indicators to confirm or verify an indication from a golden cross. Momentum indicators like the Relative Strength Index (RSX) Average Directional Index (ADX) are popular among many traders. The reason for this is because momentum indicators are usually leading, instead of lagging indicators. This basically means that they can be useful in overcoming the tendency of the cross pattern to lag behind price action.

Resistance to the Cross Signal

Some market analysts and traders remain skeptical and reluctant to apply the golden cross technique. They argue that the golden cross is not a reliable trading signal simply because the cross pattern is usually a very lagging indicator. While there is some truth in their argument, the truth is the golden cross is an important indicator in the stock market.

The golden cross is important because of the fact that it is a technical indicator popularly used by both analysts and traders. This implies that the chart pattern has higher chance of attracting a considerable amount of buying in a given market.

Should you use golden crosses when trading?

While there are traders and analysts who do not prefer using the golden cross strategy, the truth is that the golden cross is a significant market indicator. The best way to apply the golden cross is to learn how to use proper risk parameters and ratios.

Citation Links:

Golden Cross Trading Strategy – https://learn.bybit.com/trading/golden-cross-trading-strategies/

Golden Cross – https://www.investopedia.com/terms/g/goldencross.asp

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