There are numerous chart patterns and technical indicators that traders and investors use in their analysis of the financial markets, however, the one pattern that most market participants are familiar with is the Golden Cross!
In this article, you will get a deeper understanding of this technical indicator including how the golden cross forms and how you can use the golden cross to spot potential transition points in market trends.
What is the Golden Cross?
The golden cross is a commonly referenced technical indicator that consists of a short-term moving average and a long-term moving average.
The most popular period setting for the short-term moving average is 50 days whereas the most popular period setting for the long-term moving average is 200 days.
The golden cross itself occurs when the short-term moving average, reflective of recent prices, crosses above the long-term moving average, which signals that bullish momentum is starting to build and that a bull market is potentially on the horizon.
What Does the Golden Cross Tell You?Â
The golden cross signals to traders and investors that market sentiment is potentially shifting bullish after a period of sustained bearish pressure and a new bull market is in the early stages of development.
There are generally three stages to a golden cross:
- In the first stage, there must be a pre-existing downtrend that starts to bottom out as selling pressure is overpowered by buying demand and prices begin to rise. In this phase, the short-term moving average will likely be below the long-term moving average.
- In the second stage, the market creates a new uptrend in the form of a breakout back above the long-term moving average. This breakout is confirmed when the short-term moving average crosses back above the long-term moving average.
- In the third and final stage, the new bullish trend continues to follow through for higher prices. After the golden cross occurs, both of the moving averages will tend to act as support on pullbacks to continue the bullish momentum until the market eventually breaks back below them to form a death cross which signals the start of a potential bear market. As you can see in the above example of the S&P 500 chart, the golden cross occurred around March 04, 2019, on the breakout above $2700.00. After the breakout occurred, the S&P 500 transitioned into a full-on bull market that spanned for just about 12 months before breaking back below both moving averages to form a death cross below $3050.00 on March 19, 2020.
How to Trade Using the Golden Cross?
The Golden Cross is considered more of a signal than an actual trading strategy so the best way to use the golden cross to trade is to combine it with other qualifiers such as market structure, price action, and/or candlestick patterns.
When a golden cross forms, it signals that a new bull trend is in the process of forming, so as a trend trader, you will want to use this as an opportunity to look to buy dips into support in order to jump on board the new trend and extract maximum profit.
The best way to do this is to wait for buyers to show up on pullbacks into the short-term and long-term moving averages that act as dynamic support and to buy alongside strength for a move into and above previous structure highs.
The Bottom LineÂ
As with all technical indicators, the golden cross is considered to be a lagging indicator – meaning that signals will form only after certain price action develops.
This means that by the time you see the golden cross on your charts, the long opportunity might already be gone so understand that just because you see a golden cross does not mean that you have a valid trading opportunity.
Use the golden cross as a confirmation that a bull trend might be starting and pair that with price action and candlestick patterns to find low-risk, high-probability trades in favor of the new trend!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.
