The Golden Cross is a breakout candlestick pattern formed when the short term 50-day moving average for a security exceeds its long term 200-day average, backed by high trading volumes. Investors typically interpret this crossover as a harbinger of a bull market, and its impact can reverberate throughout index sectors.
The longer time horizons tend to increase the predictive power of the Golden Cross. As seen in the chart in this example, a trader may view the moment when a 50-day moving average (blue line) crosses above a 100-day or 200-day moving average (red line) as a bullish sign for the stock or security. A trader may consider taking a long position in the security, or perhaps explore call options to take advantage of the potential upside.
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The Three Stages of a Golden Cross
Golden cross patterns occur in three stages: stage one occurs at the end of a security’s downturn, signaling the completion of a sell cycle. Stage two is the crossover of the short- and long-term moving averages, followed by a trading breakout. The final stage sees the security continue its upwards trajectory, with accompanying price increases. Eventually, a pullback occurs, leading to a golden cross’ inverse – the Death Cross.
Using a Golden Cross
Golden crosses can utilize variable moving averages, from one minute to months long. Longer time periods typically equate to more sustained breakouts. 50-day short term and 200-day long term periods are most common, as they remove day-to-day volatility from the equation and paint a more accurate picture of a security’s trajectory.
Smaller time periods are most useful to day traders, who evaluate moving averages throughout a trading day to identify and trade golden crosses – 5-period and 15-period moving averages are common for their purposes. Traders use momentum indicators like moving average convergence divergence (MACD) and relative strength index (RSI) in conjunction with golden crosses to gauge ideal times to buy in or sell off a security.
Efficacy
Like any investment tool, golden crosses are not 100 percent reliable. For example, a golden cross in unstable market conditions will not always result in a bull market, especially for single equities. Research indicates short-term gains may emerge but can be less substantial – around 1.31 percent for the 30-day period post-golden cross. 12-month average gains, however, were found to be around 11 percent.
Traders use technical indicators like Moving Averages to make predictions about future prices, to verify how well a specific indicator works for a particular security and to calculate the odds of success under similar market conditions. While no single indicator works well for all securities, Tickeron’s A.I.dvisor can provide trade ideas to traders, help analyze signals to execute advantageous trades, and assist investors with making rational, emotionless, and effective trading decisions.