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A Golden Cross is one of the most popular chart patterns for investors. It occurs when a faster–moving average (200-day) of an asset crosses a slower-moving average (50-day) asset.
It must be these two periods, anything outside these periods cannot be said to be the Golden cross.
When the market is in a long-term downtrend, the 50-day moving average is below the 200-day moving average.
But as we know, no downtrend can last forever. So at the time a new uptrend starts, the 50-day moving average must cross above the 200-day moving average. This is what we refer to as the Golden cross.
So, let’s get started with the basics, as we answer the question “What is Golden cross stock?”
What is Golden Cross Stock?
A Golden cross occurs in a situation where a 50-day moving average of an asset trades higher than a 200-day moving average.
When the rate of upward movement in a short period of time is faster than the long-term movement, investors take it as a sign that it is the right time to buy.
That is, with higher trading volumes and higher trading prices, the golden cross is a sign that the stock market is set for improvement.
There are many investors with the perspective that the Golden Cross acts like a “Holy Grail”. They think it is one of the most conclusive signals of a rising market which sends off a powerful signal to buy.
Stages of a Golden Cross
Though there are investors like the ones above, some other investors doubt the logic of the Cross pattern.
The present-day evaluation opportunity favors the Golden Cross. Seeing that the last happening of the pattern is the S&P 500 Index, the index has gone up by more than 50%.
The Golden Cross has three stages:
- The first stage is where a downtrend is present but it’s on its last stage because the short-term 50-day moving average moves below the 200-day moving average.
- In the second stage, the emerging of an uptrend occurs. The rising of an uptrend is made noticeable when the short-term average crosses from below to above the long-term average thereby forming the Golden Cross.
- Their uptrend is extended, with ongoing profit that confirms an advancing market. During this phase, the Golden Cross’ two moving averages should both act as support levels when corrective downside retracements happen. As long as both price and the 50-day average remain above the 200-day average, the bull market is considered as remaining intact.
Golden Cross Stock Screener
A Golden Cross stock screener was developed to save time and bring up all the prices which make across each day.
If you do not have this screener tool, you would have to click past hundreds or thousands of charts daily.
Be informed that for a golden cross stock screener to function optimally, the price must have been moving up for a sensible period of time before the cross occurred.
The only thing that you should be taking into consideration should be the efficacy of the screener.
There are two well-known settings for moving averages, mostly used by many long term investors.
If you invest long term, then there is no need to worry about the uncertainties of short term prices.
Furthermore, if a company is standing on thriving financials with a constantly rising trend in their prices, and there’s a Golden Cross all of a sudden, it can attract more investors to the company.
Golden Cross Trading Strategy
The strategy of a Golden Cross trade is dependent on the long term trend of the stock. When there is an increase in the long term trend, the Golden Cross is at the right point and should be traded.
For accumulating portfolios, only stocks that show the golden cross should be purchased. The reason for this is that when the stock market goes through ups or downs, it makes the buyer lose potential profit before the price falls or selling them before it rises in the short-term trend of the stock.
There are certain conditions that trading strategies perform optimally under, and the best trading strategy is always the key point.
As always, you can pick a trading strategy based on your personal preference, level of discipline, available capital, risk tolerance, and availability.
- Seek for Setups after a Long Downtrend. Almost all golden cross setups are not equal. One easy method you can use is to wait for a stock that has had a long sustainable downtrend.
- Always ensure that there are no wide Spreads between Moving Averages. Thus it presents a cup and handles like the formation of the averages. Thereby looking really bullish on the surface. However, looking at the price action, you will notice an unhealthy pattern.
- Lastly, make sure that you combine double bottom patterns with Golden Cross. This strategy covers combine the double bottom chart formation with the golden cross.
Golden Cross Stock Chart
Below is an example of what a Golden Cross Chart looks like. The faint blue lines represents a 50-period SMA and the red line is the 200-period SMA.
As we can see, the chart starts with a very strong downtrend. In this downtrend, the price action stays below both the 200-period SMA and the 50-period SMA.
We notice that all of a sudden, the direction of the trend changes and the price starts to make a move to the upside.
Typically, the 50-period SMA proceeds quicker to the change of the price as it has a really strong sensitivity to the most recent price action.
As soon as the 50-period SMA crosses the 200-period SMA towards the upside, we have a Golden Cross.
How to make use of the Golden Cross
Traders can make use of the Golden Cross to help them identify favorable times to either enter or leave the market.
Traders that want to purchase security will oftentimes go into the market when the price of the security has risen above the 200-day moving average instead of waiting till the 50-day moving average to cross over.
The reason for this is that the Golden Cross is most times a major indicator of a fallback. This may not happen until the market has already become bearish from bullish.
Traders that usually sell short may make use of the golden cross as a signal that the bear market is over and it’s time to leave their positions.
A few traders choose to utilize contrasting averages to show a golden cross. Let’s take for instance, a trader may choose to replace the 200-day moving average with the 100-day moving average. The pattern can also be looked for on shorter time frames, such as an hourly chart.
Lastly, a lot of financial analysts utilize corresponding technical indicators to affirm the indication that comes from a golden cross.
The most common choices are momentum indicators like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or the Average Directional Index (ADX).
The reason for this is that momentum indicators are most times leading indicators, not lagging indicators.
Hence, they can aid in getting over the possibility of the cross patterns lagging significantly behind in price action.
The Golden Cross is relevant in the business world because it is a technical indicator that is made use of by a lot of traders and financial analysts.
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How it Works
Something a lot of traders look out for when they trade golden crosses and death crosses is the trading volume. Just like other chart patterns, the volume can be a very strong and efficient tool for confirmation. As a result, when a rise in volume comes with a crossover signal, many investors or traders will be confident that the signal is a valid signal.
Immediately a golden cross occurs, the long term moving average may be seen as a possible area of support. On the contrary, when a death cross occurs, the long term moving average may be seen as an area of possible resistance.
Crossover signals have the tendency to be crosschecked with signals from other technical indicators to look for confluence. Confluence traders combine multiple signals and indicators into one trading strategy in an attempt to make the trade signals more reliable.
One of the limitations of the golden cross is that all the indicators are lagging and no indicator can correctly predict the future. There have been so many instances where the golden cross produced a false signal. In those times that the golden cross produced a false signal, traders who placed a long term may just be finding themselves in some trouble.
The clue to making good and proper use of the golden cross together with extra filters and indicators is to make use of appropriate risk parameters and ratios. Always remember to keep a good risk-to-reward ratio and to properly time your trade. These can lead to better results.
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Golden Cross vs. Death Cross
To properly compare them, we have to define “Death Cross”. Death Cross takes place when the short-term average trends down and crosses the long-term average, literally going in the opposite direction of the Golden Cross. It is said to be used to signal a downturn in the market.
It is the opposite of a Golden Cross and is considered to be a bearish signal. A death cross normally happens in three stages just like the golden cross:
- In the first stage, the short-term moving average is above the long-term moving average in an uptrend.
- In the second stage, the trend reverses, and the short-term moving average crosses below the long-term moving average.
- Lastly, in the third and final stage, a downtrend begins as the short-term moving average remains beneath the long-term moving average.
The death cross has made a bearish signal before major economic downturns in history in 1929, 1938, 1974, and 2008.
Also, there have been times when a death cross appeared, just like in 2016, and then it was proved to be a false indicator.
Now we know what a death cross is, we understand why it’s called a bearish signal and why a golden cross is called a bullish signal.
A golden cross is identified only after the market has risen which makes it reliable. But due to its lag, it may be difficult to know when the signal is false.
Regardless, I hope this article gives you profound knowledge about a golden cross.