What Is The Golden Cross Pattern And How You Can Trade It?
When we talk about the Golden Cross, we aren’t talking about an epic like the Lord of the Rings or The Game of Thrones in which people are fighting over some cross made of gold. We are from the trading community and we are interested in making money from price volatility. In that sense, the Golden Cross is a technical chart pattern that indicates a bull market. It is considered by traders to be a signal to go long. Before we go deeper into the Golden Cross, it is important to first understand the indicator that allows us to spot the Golden Cross. This indicator is called the moving average.
The Moving Average
A moving average is exactly what the name says, it is an average that moves with time. The moving average takes into account the price over a fixed period in the past and gives an average. The lookback period stays constant while the average “moves” as we go ahead in time. Sounds confusing? Let’s discuss using an example.
Say you are trading Bitcoin. The price of Bitcoin moves all over the place. In fact, the price of most cryptocurrencies moves quite a bit as the asset class is considered to be very volatile. Let us assume that it is 1st January 2023. A 50-day moving average will look at Bitcoin prices over 50 days prior to 1st January 2023 and calculate an average of those prices. This average will be the moving average on 1st January 2023. Then, on 2nd January 2023, the average changes because now the calculation of the average goes back 50 days from 2nd January 2023 and not the 1st. So, the 50-day average on 2nd January will be slightly different from what was calculated on the 1st. This “moving” average is plotted over time and looks something like the image shown below.
(50-day simple moving average Source: cerusmarkets.com)
What Happens If We Change The Lookback Period?
The example above discusses the 50-day moving average. But, what if the 50-day lookback period was reduced to, say, 20 days? Or what if the lookback period was increased to 200 days? The 20-day moving average will calculate the price average over the previous 20 days while a 200-day moving average will calculate the price average over the previous 200 days.
(20, 50, and 200-day moving averages Source:cerusmarkets.com)
The image above shows the 20-day moving average in yellow, the 50-day moving average in blue, and the 200-day moving average in dark red. As you can tell, the shortest moving average (20-MA) appears to be the most sensitive while the longest moving average (200-MA) appears to be the least sensitive. In other words, the longer moving average tends to “filter out” the noise while the shorter moving average tends to highlight smaller price movements.
The most commonly used moving average lookback periods are 50 days and 200 days. Why is that the case? There is no clear-cut answer, but in the stock markets, there are 200 trading days in a year. So, the 200-day moving average calculates the average price over the past trading year. Similarly, a 50-day moving average covers 2 months. A 20-day moving average covers roughly 1 month of trading. The crypto markets are not shut on the weekends, so the lookback periods may not make sense. However, most of the trading community uses the 50 and 200-day averages. So, it makes sense to use them.
The Golden Cross
The Golden Cross pattern occurs when the 50-day moving average crosses and goes above the 200-day moving average. It is considered to be a bullish signal and traders may take long positions when a Golden Cross occurs. The believers of the Golden Cross would argue that such a crossover means that an uptrend is about to begin. The short-term moving average (50-day in this case) is the first one to react to an uptrend. Gradually, the longer-term (200-day) moving average also catches up.
It must be clarified that the Golden Cross alone (or any indicator) cannot guarantee profits. It is simply another tool in the toolkit of a trader. So, one should not view the Golden Cross in isolation. Rather, it has to be used in combination with other indicators and price action analysis. First, one must identify which stage of the Golden Cross is currently playing out.
The Golden Cross pattern plays out over three stages. In stage one, the price fall tends to gradually stop as selling pressure eases. A bottoming out happens in this stage before a reversal occurs. The second stage is when the reversal transitions into a breakout. The shorter moving average crosses over the longer average and the Golden Cross pattern appears. The third stage is when both the 50-day and 200-day moving averages act as support as the price makes higher highs and higher lows.
A trader using the Golden Cross will have to perform analysis to identify the moderating selling pressure, the bottoming out, and the reversal. After validating those trends, the Golden Cross acts as a confirmation and gives the trader conviction to go long.
(Golden Cross in May 2020 for BTC Source:cerusmarkets.com)
Sometime in May 2020, after the pandemic outbreak caused mayhem in all the markets around the world, there was a period of consolidation before a massive bull run. The Golden Cross occurred in BTC in May 2020 and the price almost tripled from that point.
More recently, in November 2022, Litecoin saw a Golden Cross after which the price rose significantly.
(LTC Golden Cross in Nov 2022 Source:cerusmarkets.com)
Using The Golden Cross Pattern In Other Ways
The Golden Cross pattern can also be used in ways other than simply going long. Those who are on the short side can use the pattern to square off their positions as the price may be about to move against them.
Traders can also use different moving averages than the ones we have discussed. For example, since the cryptocurrency markets operate on all days of the week, one can use a 300-day moving average instead of a 200-day moving average. Similarly, a 30-day moving average can be used in place of a 20-day moving average. However, we recommend that you backtest and paper-trade new lookback periods before deploying it live. Traders can also use a 20-day and a 50-day moving average for the short-term and long-term averages. There is no requirement to use a 200-day moving average.
The Golden Cross pattern can be used on daily, monthly, weekly, and even hourly charts. You can trade it at any timeframe.
The Golden Cross pattern signals a bull run much after the uptrend has initiated. Traders who are eager to go long earlier may enter with a small position when the price crosses the 200-day moving average and then increase the position size when the Golden Cross validates their bullish bet.
We hope you found this article on Golden Cross useful. If you are ready to apply this knowledge in trading cryptocurrencies, then go ahead and open an account with Cerus Markets. It offers cryptocurrency CFDs and currently has a 100% welcome bonus offer for new users.