Golden Cross
A golden cross is a
chart pattern where a shorter-term
moving average (MA) crosses above a longer-term moving average. A golden cross is typically considered to be a
bullish signal.
A golden cross occurs in three phases:
There’s a downtrend where the shorter-term MA is below the longer-term MA.
The market reverses and the shorter-term MA crosses over the longer-term MA.
A continued uptrend starts and the shorter-term MA stays above the longer-term MA.
When considering a golden cross, the most commonly used moving averages are the 50-period (the previous 50 hours, days, weeks, etc.) and the 200-period moving average. Many other moving average pairs may be used, as the main idea is simply that the shorter-term average price is crossing above the longer-term average price. For example, day traders may use the 5-period and the 15-period moving averages to find quick entry and exit targets. Other common examples are the 15-period and the 50-period, or the 100-period and the 200-period moving average pairs.
A golden cross can be valid using both simple moving average (SMA) pairs and exponential moving average (EMA) pairs. Some traders may look for high trading
volume to accompany the golden cross for additional confirmation of the pattern.
Once the crossover happens, the longer-term moving average is typically considered to be a strong area of
support. Some traders may wait for a retest of this moving average for an entry point into the market.
Generally, as with any chart pattern, higher-timeframe signals are typically more reliable than lower-timeframe signals. As such, a golden cross on the daily chart will probably have a more significant impact on the market than a golden cross on the hourly chart.
Even so, it’s important to note that even a high-timeframe golden cross can be a false signal. In a scenario like this, the golden cross technically happens, but the market reverses shortly after, and the golden cross is invalidated. This is why it’s always important to properly
manage risk and protect your downside.
The opposite of a golden cross is a death cross, which is a chart pattern where a shorter-term moving average crosses below a longer-term moving average. As such, the death cross is typically considered to be a
bearish signal.
