The most important aspect in the world of trading is correctly identifying the long-term trend. Once that is done, the remaining steps are not very difficult as a trader only needs to look for buying opportunities in an uptrend and selling opportunities in a downtrend.
In reality, many traders complicate the process by waiting at lower levels to buy in a bull market and missing out on much of the rally. Then when the trend reverses and the price begins to fall, the same traders start buying, often leading to losses.
To avoid this clutter, traders can use the main moving average convergence patterns to get a better indicator of market dynamics and trend direction. In last week’s article we looked at the “Death Cross” and this week we’re going to look at the “Golden Cross” pattern. These settings can help traders keep a downtrend in check and give them a signal to start buying when the trend becomes bullish.
Let’s examine this pattern and learn how to use it in commerce.
What is a golden cross and how is it made?
A gold cross is a configuration that signals a possible change in a downtrend. It is formed when a moving average over a faster period of time, typically the simple moving average over 50 days, exceeds the longer-term moving average, generally the simple moving average over 200 days.
In a downtrend, both the 50-day SMA and the 200-day SMA are sloping. However, when the price reaches an attractive level, long-term investors begin to accumulate, which stops the pace of decline. As more and more investors start buying, the trend starts to get bullish.
Any sustained upside movement will cause the 50-day SMA to reverse direction. However, the 200-day SMA is slower to respond. So when it falls or falls, the 50-day SMA rises above it, creating a golden crossover.
When a gold cross forms, it is a sign that the downtrend has ended and a new uptrend may have started.
Like any configuration, however, the gold crossover isn’t foolproof. There can be multiple false signals, but with a few filters traders can reduce whipsaws.
A profitable golden cross
Bitcoin (BTC) bottomed at $ 3,858 on March 13, 2020, and the final golden cross formed on May 21, 2020 when the price closed at $ 9,061.96. This means that the BTC / USD pair had already moved 134% from the lows by the time the gold cross confirmed the turnaround.
Inexperienced traders may have seen the price rise too quickly and waited for a deep correction to buy. However, when there is a trend reversal, there is seldom the option of buying at significantly lower prices, as was the case here.
The rally never looked back, hitting an all-time high of $ 64,899 on April 14, 2021, a massive 616% increase from the level at which the golden cross formed. This shows that the trader who bought and held his position after the formation of the golden cross would have made huge profits.
However, not all gold crosses offer such great returns and whip saws sometimes fall victim to traders.
A failed golden cross
Bitcoin fell from a local high of $ 13,868.44 on June 26, 2019 to a local low of $ 6,430 on December 18, 2019. The golden cross was formed on February 18, 2020 when the pair closed at $ 10,188.04.
However, traders who bought after the gold cross was formed could have taken quick losses as the pair tumbled to $ 3,858 just days later. This shows how traders can sometimes be caught on the wrong side only to buy for a gold cross.
Filters can signal when a golden cross sends the wrong signal
Traders could avoid buying if the gold cross forms while the 200-day SMA is still on the downside. You can wait for the 200-day SMA to flatten or reverse direction before buying as it can reduce whiplash.
As an example, EOS formed a gold crossover pattern on February 8, 2020 when the price was $ 4.76. That price passed the filter as the 200-day SMA flattened out. However, if traders had opened a position, it would have turned into a loss as the EOS / USDT pair hit a high of $ 5.49 on February 17, 2020 and then fell sharply to $ 1.35 on March 13, 2020.
The second gold crossover on August 22, 2020 failed the filter as the 200-day SMA was sloping down when the pattern formed. This would have prevented traders from getting caught in this trade.
The third golden cross that formed on December 12, 2020 and passed the filter but would have hit the stop loss by breaking the $ 2.20 support on December 23, 2020. Eventually, the fourth golden cross, which formed on February 8, 2021, turned to be profitable.
The example above shows that the gold cross does not act as an ideal indicator when the price is stuck in a range. Therefore, traders cannot add another filter to buy until the price goes out of range. This can further reduce whiplash and help traders only buy when trends are rising.
When a cryptocurrency is trending down, traders can wait for the golden crossover to occur before starting their purchases. This could save traders from trouble in a bear market.
Once the gold cross holds and a new uptrend is confirmed, traders can look for buying opportunities. Among the many possibilities, one highlighted in a previous article could be useful in the dips to the 20-day EMA or the 50-day SMA.
A gold cross can confirm that a downtrend has ended and a new uptrend may have started. Until a golden crossover forms, long-term investors can avoid cherry-picking as this can result in losses in a downtrend.
However, like any other pattern, the golden cross is not perfect. It can whiplash if the currency enters a consolidation during the formation of a bottom. Therefore, traders should take precautions to avoid falling into bullish traps.
Once the uptrend after the golden crossover is established, traders can look for buying opportunities and follow the trend until a reversal is signaled.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you will need to do your own research when making a decision.