Golden cross pattern explained with examples and charts

What is a golden cross?

A golden cross is a chart pattern in which a relatively short-term moving average crosses above a long-term moving average. The golden cross is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average (such as the 50-day moving average) breaking above its long-term moving average (such as the 200-day moving average) or resistance cross. shallow.

Since long-term indicators carry more weight, the golden cross indicates the possibility of a long-term bull market emerging. High trading volumes usually strengthen the indicator.

How does a golden cross form?

The golden cross is a momentum indicator, which means that prices are constantly rising – gaining momentum. Traders and investors changed their outlook to bullish rather than bearish. The indicator generally has three phases.

The first phase requires a downtrend to eventually bottom as buyers overwhelm sellers. In the second phase, the shorter moving average crosses the larger moving average to cause a breakout and confirms a downtrend reversal.

The final phase is a continuous uptrend after the crossover. The moving averages act as support levels on pullbacks until they cross downward again.

The most commonly used moving averages in the golden cross are the 50-day and 200-day moving averages. In general, longer periods tend to form stronger, longer-lasting outbreaks. For example, the 50-day moving average crossing through the 200-day moving average on an index such as the S&P 500 is one of the most popular bullish market signals.

Day traders usually use smaller time periods such as the 5-day and 15-day moving averages to trade intraday gold crossover breakouts. Some traders may use different periodic increments, such as weeks or months, depending on their trading preferences and what they believe works for them.

But when choosing different time periods, it is important to understand that the larger the chart time frame, the stronger and more lasting the gold cross breakout tends to be.

Example of a golden cross

The image below uses a 50-day and a 200-day moving average. The 50-day moving average declined over several trading periods and eventually reached a price level that the market could not support. The 200-day moving average has flattened after trending slightly lower.

Prices have been steadily increasing over time, creating an uptrend in the 50-day moving average. The trend continued, pushing the moving average of the shorter period higher than the moving average of the longer period. A golden cross has formed, confirming a reversal from a downtrend to an uptrend.

Note that the price range of the candlesticks made a significant jump when the downtrend bottomed out and turned into an uptrend. Something probably occurred that changed investor and trader market sentiment at this time. The candle bodies were large (the difference between open and close prices), and more days closed with prices much higher than open during the first rise after the 50-day moving average bottomed.

The difference between a golden cross and a death cross

A golden cross and a death cross are opposing indicators. The golden cross confirms a long-term bull market ahead, while a death cross indicates a long-term bear market. Any crossover is considered more significant if it is accompanied by a high trading volume.

Once the crossing occurs, the long-term moving average is considered an important support level (in the case of the golden cross) or resistance level (in the case of the death cross) for the market from that point forward. Any cross can appear and indicate a trend change, but they occur more often when a trend change has already occurred.

Limitations of the Golden Cross

All indicators are “behind”, meaning that the data used to form the charts has already occurred. This means that no indicator can truly predict the future. Many times an observed golden cross produces a false signal. Despite its apparent predictive power in predicting past major bull markets, golden crosses also frequently fail to manifest. Therefore, other signals and indicators should always be used to confirm a golden cross.

The Bottom Line

A golden cross is believed to confirm the reversal of a downtrend. The key to using the golden cross correctly – with additional filters and indicators – is to use profit targets, stop loss and other risk management tools. Remember to maintain a favorable risk-to-reward ratio and to time your trade rather than just mindlessly following the cross.