Golden Cross Pattern: What is it and how does it work?
At times, trading can be very overwhelming. Timing one's entry and exit points in a volatile market is easier said than done. However, to help make those decisions a lot easier, market participants carry out extensive technical and fundamental analyses.
Fundamental analysis can help reveal the market sentiment, which provides insight into how traders feel. Technical analysis, on the other hand, can help predict what will happen with greater precision. This usually involves chart patterns that can signal future price behavior. One such pattern is called the golden cross.
What is a golden cross?
A golden cross is a widely recognized chart pattern that can be useful for market analysis. They form when a short-term moving average (MA) crosses over a long-term moving average toward the upside. This is considered a bullish crossover.
The golden cross isn't a new phenomenon. In fact, it has been used for decades within the stock market. The golden cross has since found its way into the crypto space, as it is a universal tool that can be used within any market.
Understanding the components of a golden cross
As mentioned, a golden cross is a bullish crossover formed when a short-term moving average moves above the long-term MA. In the alternative case that the short-term MA moves below the long-term MA, this is known as the death cross — or a bearish crossover.
As for moving averages, they illustrate the overall market sentiment of a specific asset during a specific period. If the price trades above the moving average, this tends to signal that the buyers are overpowering the sellers.
Overall, if a short-term MA crosses above the long-term MA, this is one of the most common bullish trading signals. It indicates that both short-term and long-term traders are bullish on the asset.
What can a golden cross tell you?
While the golden cross is a trading signal that indicates price appreciation, there is more to it than that. To fully understand them, knowing the golden cross's three formation stages is important.
The first stage occurs when the price begins to flatten out after a prolonged downtrend as the sellers' power gets depleted. This may suggest that the sellers have changed their trading strategies or that those who intended to sell have done so.
The second stage takes place when the short-term MA crosses the long-term MA. The moment the two lines cross, the bullish signal is confirmed.
Finally, in the third stage, the price's continuous upside movement completes the cross formation. This signals that the bulls are gaining momentum, increasing their buying pressure.
How to use a golden cross to your advantage?
After understanding what a golden cross is, the question is how to use it to your advantage. Every trader's goal is to use any piece of information they can get to make a more precise prediction. This is why market analysis is crucial in the financial industry.
Once the golden cross is confirmed, you must build an adequate trading strategy. To create a successful strategy, it must include some risk management tools. Risk management is important because it can protect your funds if the situation takes a sudden turn. Price action can suddenly change by a highly-impacting event. The more volatile the asset, the greater the chance of something like that happening. Profit-taking and stop-loss orders are the best way to do this.
Stop-loss orders can help limit your losses if the price suddenly drops. Meanwhile, profit-taking is useful in exiting the market at a certain price. It is sometimes necessary to set a take profit price as they lock in earnings and help traders stick to their initial plan.
Limitations of using the Golden cross
The golden cross is one of the most popular trading signals but has limitations. You should be aware that all indicators are somewhat lagging. This is sometimes the case with the golden cross, as the uptrend tends to start before the bullish cross has occurred.
It is also worth noting that a golden cross can be a false indicator. This is true for any technical indicator. Regardless of how accurate they are, they are not 100% accurate. A golden cross might appear, but the price might fail to follow through.
The best way to avoid making the wrong move is to use the golden cross alongside other technical indicators. If a price surge is genuinely coming, more than one indicator will signal it.
Can the golden cross strategy be used in crypto trading?
The golden cross can be used in any market. While it originated in the stock market, it can be used for commodities, forex, and yes — even crypto.
The cryptocurrency market is still a relatively young and emerging market. But, regarding technical analysis, it is not only useful — it is crucial for your success. The crypto market is highly volatile. As a result, making as accurate predictions as possible is key to avoiding losses.
Should you use the golden cross while trading?
The golden cross has advantages and disadvantages, just like any other technical indicator. It is very easy to spot, and one of the most popular trading signals out there. But, it is also a lagging indicator, and it can sometimes be false. This makes it risky, but only in situations where you use it on its own, which is why it is suggested to use the golden cross alongside other technical indicators, such as the RSI and MACD.
So, if you spot a golden cross, the first move is to look up other indicators before entering a position. If you keep that in mind, then add the golden cross to your market analysis strategy.
FAQs
What is a golden cross?
The golden cross is a technical indicator commonly used in the technical analysis of any market. It represents a bullish crossover of the short-term and long-term moving averages.
What is the golden cross strategy?
The golden cross strategy requires traders to monitor moving averages for a specific asset. When a short-term MA crosses above the long-term MA, this is a bullish signal. However, traders also need to confirm the legitimacy of the indicator by checking if other indicators say the same.
Is Golden cross EMA or SMA?
The golden cross strategy can be implemented using both Exponential Moving Averages (EMA) and Simple Moving Averages (SMA). Both types are commonly used in technical analysis, and the choice between them depends on the traders' preferences.
What is the golden and death cross?
The golden cross and death cross are two technical analysis patterns that signal bullish and bearish markets, respectively. The golden cross is formed when a short-term MA crosses above the long-term MA. The death cross is formed when a short-term MA crosses below the long-term MA.
