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Top 11 Golden Cross Trading Strategies for Investors and Traders

what is golden crossover in trading

This is largely attributed to the fact that this indicator is easy to follow, even though it may occur less frequently as an indication to take action as compared to other technical indicators. Commonly used moving averages are the 50-day moving average (DMA) and the 200-DMA for the short- and long-term moving averages respectively. A golden cross is a chart pattern in which a relatively short-term moving average crosses above a long-term moving average. A golden cross is the crossing of two moving averages, a technical pattern indicative of the likelihood for prices to take a bullish turn.

  1. When a Golden Cross occurs, it signals that an uptrend may be emerging from either a downtrend or a sideways trading range.
  2. One key issue with the golden cross often discussed is the fact that it is a lagging indicator.
  3. To catch the next upward leg right from the beginning, traders should aim for pullback points, i.e., when the price pulls back to the short-term MA.
  4. Now that we know a fair bit about a golden cross conceptually, let us put all of that into action and discuss the trading strategies, one at a time.

This basing period is the battle between the bulls and the bears. Here we have a bullish golden cross stock pattern when the faster SMA on the chart breaks up and through the slower SMA in a bullish direction. Financial expert Jeffrey Marcus also noted the positive impact on the stock market after golden crosses. He also agrees that golden crosses are not a definite timing signal to buy. In this article, we’ll uncover one of the most important and popular setups using moving averages – the golden cross.

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The Golden Cross Explained + Three Easy Strategies

When plotted on a price chart, you’ll notice the shorter-term moving average line crossing above the longer-term moving average line, resembling the shape of a “golden cross,” hence the name golden crosses. It is the opposite of a death cross, which is a bearing indicator when a long-term moving average crosses under a short-term one. Day traders commonly use smaller periods like the 5-day and 15-day moving averages to trade intra-day golden cross breakouts. Some traders might use different periodic increments, like weeks or months, depending on their trading preferences and what they believe works for them.

A golden cross involves the crossing of two moving averages in a bullish way. And it’s simple, works well with other indicators, and can give reliable long-term insights. Some analysts define it as a crossover of the 100-day moving average by the 50-day moving average; others use the 200-day and 50-day moving average. The short-term average trends up faster than the long-term average until they cross. Golden crosses, alongside death crosses, are popular indicators watched by market participants and gains traction with news headlines as well.

What are the three stages of a golden cross?

The pullback strategy banks on the idea that prices retrace to specific support zones before continuing the upmove. The Golden Cross is a bullish trading signal again, suggesting a potential upward trend in the stock market again. However, the market can be quite noisy, so you need to still practice money management, and of course make sure you have all of your risk management tools in effect. This helps me filter out false signals.” There are also other indicators that professionals follow, and it comes down to your personal perference and any backtesting that you have done. The golden cross is a momentum indicator, which means that prices are continuously increasing—gaining momentum.

Historical or hypothetical performance results are presented for illustrative purposes only. Traders use moving averages as part of their investment strategy. They are based on time periods of 15, 20, 30, 50, 100, and 200 days and are dependent on certain goals and objectives. The formation of a golden cross may indicate a bull market is brewing. This strategy can be considered an extension of the basic golden crossover strategy.

what is golden crossover in trading

Therefore, a golden cross is better at helping you reach a short- to mid-term decision rather than a long-term one with a broader market view. The idea behind a double bottom formation is that the asset tries to resist a drop. And if you are confused about drawing the retracement levels correctly, aim to connect the swing low to the swing high, post the golden crossing. Diamond Chart Pattern Definition A diamond chart formation is a rare chart pattern that looks similar to a head and shoulders pattern with a V-shaped neckline. The rounding bottom pattern is a technical setup for the patient trader. This is because the pattern can take quite a bit of time to develop before any significant price moves begin.

You can buy that initial breakout after the base, but realize you could still be in the thick of a bear market, so don’t get married to the stock. Look for opportunities as the stock rises to secure your gains. “They’re perfectly valid, but people treat them all as individual trades rather than being part of a system. You can’t pick one and then when it doesn’t work say ‘so much for that’. It’s an absurd thing for short-term traders and business TV to take notice of,” said Boorman.

How does Golden cross work?

Notice how close the exit would have been to the death cross still circled. The profit potential will depend on the stock and the setup going into the trade. The averages for 10, 20, 40, 80, 160, and 320 days following each was 0.53%, 0.89%, 2.64%, 8.17%, 10.45%, and 20.95%, respectively,” added Marcus. Such is known as a “Golden Cross” and has now happened 25-times over the past 50-years.

Chart patterns are popular among analysts and are used, along with other indicators, to anticipate changes in the stock market. Just as with the cup and handle pattern and the head and shoulders pattern, investors use the golden cross pattern to help them identify trends. A golden cross is a reliable technical indicator used to determine the onset of a bull market. However, after a bear phase, it is best suggested to leverage a golden cross for determining a bullish signal and not a bull market. Once you start seeing a crossover scenario, you can quickly overlook the moving averages and draw those conventional resistance lines on the chart. These lines are specific breakout zones, and you might consider entering the trade only if these levels are breached post the golden crossing.

Example of a Golden Cross

The golden cross is a powerful trade signal, but this does not mean you should buy every cross of the 50-period moving average and the 200. While it might be considered a valid golden cross, there are better opportunities in the market with smoother, less volatile entry signals. That is, with high trading volumes and higher trading prices, the golden cross is possibly a sign that the stock market, and individual stocks, are poised for recovery. Such information is time sensitive and subject to change based on market conditions and other factors.

A golden cross plus a double bottom pattern

The important thing is to try to distinguish a longer-term bearish reversal from an exaggerated correction. Popular moving averages among analysts and traders are the 50-day and 200-day moving averages. This is because there are 50 trading days in a quarter and 200 trading days in a year (since holidays and weekends aren’t trading days). The belief is that longer trading periods illustrate stronger market signals, whether they are bullish or bearish. You need to use the volume indicator, price chart, and moving averages.

The first stage presents a stagnating downtrend as strong buying interest overwhelms selling interest. “TPA calculated the performance of the S&P , 20, 40, 80, 160, and 320 days following each of the 25 Golden Crosses since 1970. The average performance is 0.88%, 0.98%, 3.25%, 6.73%, 9.57%, and 15.70%, respectively. “Just like any trend-following system, it will have plenty of whipsaw losing trades, but the winners will more than make up for those.

One key issue with the golden cross often discussed is the fact that it is a lagging indicator. Information of historical prices lack the predictive power to pre-empt future price movements. This is also the reason why it is frequently used hand-in-hand with other indicators or fundamental analysis to make a trading decision. Once again using Apple as an example, one can see that the 50-DMA had risen above the 200-DMA in late 2016, providing a bullish signal. As we have mentioned, other indicators are oftentimes used in conjunction to confirm the trend and, in this case, the MACD likewise exhibits this build up to the crossover point. For example, if buying activity and volume dries up following a Golden Cross event, you might want to figure out why the bullish momentum appears to be dwindling.

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