What Is The Golden Cross & How To Trade It

Golden Cross

The Golden Cross is a technical analysis that gives a bullish signal. It occurs when a relatively short-term moving average crosses above a long-term moving average. Some traders may even use the Golden Cross to look for short (sell) trades.

What is the Golden Cross?

The Golden Cross is a bullish pattern formed from a crossover involving price’s short-term moving average (such as the 15-day moving average) going above its long-term moving average (such as the 50-day moving average) or above its resistance level. Some traders consider long-term indicators to be more effective whilst the Golden Cross indicates a bullish market, it can still be used the same way in a bearish market.

Trades need to identify three stages to a Golden Cross. They are:

  1. Firstly, before the crossing of the moving averages, a downtrend also establishes near the short-term moving average, which crosses below the long-term trend.
  2. In the second stage, also known as the intersection, a new trend appears whereby the short-term moving average takes over the long-term moving average.
  3. Finally, there needs to be a continuation where the uptrend holds on, and the short-term downtrend moving average acts as a support for prices.
Golden Cross on the chart
Golden Cross on the chart

Golden Cross Example

A monthly 50-period and 200-period moving average Golden Cross can be significantly more robust and longer-lasting than the 50, 200-period moving average crossover on a 15-minute chart.

The Death Cross is the opposite of the Golden Cross, where a short-term moving average crosses the longer one from below.

How to use the Golden Cross?

The most commonly used moving averages as the Golden Cross are the 50-period and the 200-period moving averages. The period represents a specific time. Generally, more extensive periods tend to form stronger breakouts. For example, the weekly 50-day moving average crossover up through the 200-day moving average of any forex pair is a strong bullish signal.

Day traders or intra-day traders usually utilize smaller time periods like the 5-period and 15-period moving averages to trade intra-day golden cross breakouts. The time interval can also be adjusted from 1 minute to weeks or months. Just as more considerable periods produce strong breakouts, the same applies to chart periods as well. The larger the chart time-frame, the more sharp and lasting the golden cross breakout can be.

As with any technical indicator, the probability of working with a certain forex pair or any other asset does not guarantee that it will work on the other. An important issue with the Golden Cross is that it is a lagging indicator. Information regarding historical prices lacks the predictive power to anticipate future price fluctuations. This is why it is frequently used in conjunction with other technical indicators and fundamental analysis.

Golden cross breakout signals can be used with various momentum oscillators like stochastic, MACD (moving average convergence divergence), and RSI (relative strength index) to find out when the bullish trend is overbought or oversold. This helps to spot exact entry and exit points.

Golden Cross trading strategy

The Golden Cross can be used by long-term and short-term traders, depending on that their selection of moving averages is. As describes earlier, it can be better to apply the Golden Cross with other technical analysis to make trading strategies more effective.

As the pattern is bullish, it only provides buy signals.

Golden Cross buy strategy

  • The short-term moving average should break above the long-term moving average.
  • Wait for the price bar to go bullish before entering.
  • Enter after pinpointing the Golden Cross.
  • Set a stop-loss near the recent low from the entry point.
  • Exit the trade when the trend changes.

Golden Cross conclusion

The Golden Cross gives entry and exit points and can be considered a strong indication of a trending market. To help try and make it more effective, Golden Cross can be applied with other technical indicators.