Understanding Golden Cross Trading for Cryptocurrency

Trading Strategies
Understanding Golden Cross Trading for Cryptocurrency

Technical analysis is a tool used by investors and traders in the cryptocurrency market to identify potential trends and gain profitable returns. This type of analysis uses various technical indicators such as the moving average and the golden cross. 

What Is a Golden Cross?

The golden cross is a chart pattern that occurs when a short-term moving average crosses over a long-term moving average, such as 15-day over the 50-day moving average or resistance level. It’s a powerful indicator that suggests a bull market is on the horizon. 

The long-term moving averages are often more influential than the short-term averages, and the combination of these factors makes the golden cross an ideal trade indicator.

What a Golden Cross Shows

The golden cross is a series of moving averages that investors can use to identify a potential reversal. The first stage takes place when the market ‘bottoms out’. When the shorter moving average crosses over the larger moving average, it triggers a break and confirmation of a trend reversal. The third stage is when the market continues to follow through with higher prices.

The moving averages act as support on a breakdown, and they can then form a death cross once the trend line and the shorter moving average converge. Death crosses are the opposite of the golden cross, as the shorter moving average crosses over to the longer moving average.

The most common moving averages are the 50-period or the 200-period moving averages. The periods represented by these averages are known as time increments, and they can often form stronger lasting breakouts when longer.

One of the most popular technical signals is when the 50-day moving average exceeds the 200-day moving average. It is because buying can be seen across the index components and sectors. A rising tide can lift all boats, which is why investors often use a golden cross.

Day traders often use shorter periods like the 5- and 15-period averages to trade intraday gold cross breakouts. They can also adjust the time interval of the charts by a few minutes. Similarly, the larger the frame, the stronger the golden cross breakout’s lasting power in chart periods.

How Effective Is the Golden Cross?

So many algorithms and traders follow the 200- and 50-day moving averages of the S&P 500. Hence, market reactions are almost always when the bull or bear markets are tested.

For instance, according to Arbeter, the market will often bounce back whenever a bear market or a short-term correction occurs. He added that if you look back over the past century, you’ll notice that the 50-day moving average has been working consistently in major indices.

The technical indicators used on the wild bitcoin chart are not reliable, according to Arbeter. For instance, the death cross in July marked the end of the bear market’s downward trend instead of an intensification.

For investors who are new to the market, the golden cross could be a good momentum signal, says Edward Moya, a senior analyst at OANDA Group. For instance, if the 50-day moving average crosses the 200-day moving average, it suggests that the short-term trend is strengthening, which could reduce the chances of a sudden collapse. 

The Difference Between a Golden Cross and a Death Cross

The golden cross and the death cross are two of the most common technical indicators that indicate a long-term bull market or a bear market. They refer to the likelihood that a long term moving average will cross over a short-term moving average in the future.

The golden cross is a technical indicator that indicates a potential upward trend in a market. It can be triggered by a short-term moving average crossing above an extensive moving average.

The death cross signals that a market is entering a significant downturn. Similarly, the golden cross is a function of the moving average, considered more significant when trading volume is high.

When the long-term moving average crosses above a primary support level, it’s considered a significant support level for the market. Similarly, when the death cross crosses above a resistance level, it’s regarded as an important resistance mark for the market.

Although the death cross and the golden cross may signal a trend change, they more often confirm a strong trend has already occurred.

Golden Cross Limitations

The technical indicators are not completely accurate. For instance, the golden cross can give false signals. The golden cross remains risky despite the strong ability to predict the future.

Before investors can make a trade, they must check the golden cross against other indicators and signals. These should be used in combination with the risk parameters and ratios. Investors need to consider investing in a strategy with a promising risk-to-reward ratio. This move will allow them to get better results than blindly following the golden cross.

Final Thoughts

Analysts consider a golden cross as a clear indicator of an upcoming market bull run. It is the opposite of a death cross, a bearing indicator when a long-term moving average crosses under a short-term market average.

It also showcases a lagging indicator only after the market has risen, making it seem reliable. However, the lag also presents a challenge for investors to know whether the signal is false or not. Nonetheless, experts consider the golden cross indicators as one of the most effective ways to analyze financial markets.

Julius Mutunkei

Julius is a blockchain reporter skilled at synthesizing all crypto-related information to make articulate texts easy for anyone to grasp. With a beginner's level certificate in Financial Analysis, Julius can read, interpret and report crypto findings to help investors exercise the best judgment in their decision-making process. When he is not caught up in the crypto frenzy, Julius likes playing a game of FIFA with his online buddies.