A Golden Cross is a type of chart pattern found when using technical analysis.
It is a bullish breakout pattern that is formed when a short-term moving average crosses above a long-term moving average.
When supported by high volume levels, a Golden Cross signals that a bullish trend is emerging and so it serves as a valuable indicator for traders.
For a Golden Cross to be confirmed, technical analysts look for three distinct stages:
i. Stage 1
The market or stock has been in a persistent downtrend and selling has abated, such that the market/stock is now bottoming out.
ii. Stage 2
The short-term moving average crosses above the long-term moving average and a breakout in the price occurs.
If a breakout in prices does not occur, this means that the trend reversal from stage 1 is not confirmed and you have a false signal.
iii. Stage 3
Following the breakout, the price continues in an uptrend.
As prices continue to move upwards, the moving averages serve as indicators of support levels for any pullbacks that may occur.
Should the price fall through these levels, traders are at risk of the Golden Cross trend breaking down and potentially reversing.
While there is no universally agreed period for the short-term and long-term moving average, the most popular two tend to be a 50-period moving average for the short-term indicator and a 200-period moving average for the long-term indicator.
Since periods are prescribed, rather than specific time intervals (like days or weeks), this means that the indicator is very flexible and traders can apply it to long term, multi-month movements as well as intraday trading in intervals measured in minutes.
Generally speaking, the larger the time interval (weeks and months compared to minutes and hours) the stronger and longer that the Golden Cross uptrend is likely to go on for.
When applying it to your trading, there are two main ways it can be considered.
The first is to serve as an entry and exit point for individual trades.
For example, if you’re following an individual stock you might only enter when a Golden Cross occurs and then exit when the golden cross trend collapses.
The second use case is for trade management, whereby you only enter individual stock trades when the overall market experiences a Golden Cross and likewise exit all positions when the trend breaks down.
This is an example of leveraging the “a rising tide lifts all boats” concept.
Conclusion
The Golden Cross is a bullish indicator found when a short-term moving average (typically 50 periods) crosses above a long-term moving average (typically 200 periods).
Provided a downtrend bottoms out prior to the Golden Cross forming and a breakout and subsequent uptrend forms, traders can consider the market or stock as entering a bull phase.
A Golden Cross can be used to identify entry and exit points for an individual stock or as a filter for when the overall market is bullish and “a rising tide lifts all boats” concept can be applied.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
