Golden Cross

12 MIN

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In 2023, as the world of cryptocurrency trading continues to evolve, numerous traders lean on graphical analytics tools such as trading volumes, price movements, and various kinds of moving averages to plot trend lines and pinpoint pivotal market shifts. This article aims to deliver an in-depth exploration of the Golden Cross pattern, a highly regarded indicator in crypto chart analysis. We will dissect its critical stages and delve into the different types of moving averages that are used in constructing this pattern. Continue reading to elevate your trading skills and make the most out of employing the Golden Cross strategy in this dynamic market landscape.

What is the Golden Cross?

Golden Cross is a chart pattern that indicates the beginning of a strong uptrend on the given market. It appears at the crossover of moving averages (MAs) of shorter (usually 50-period) and longer terms (usually 200-period).

MA is a customizable technical indicator that sums up data points of the past time period and divides the total by the number of those points. It gives the traders an idea about potential changes in the market trends. As the name of these TAs implies, analysts always recalculate them using the latest data about prices.

Golden Cross Chart Pattern Stages

  1. The main characteristics of the first phase are the ending of the downtrend after the price dips to its bottom value and buying interest is much higher than selling interest. The short-term MA is way under the long-term MA.
  2. The appearance of an uptrend signifies the beginning of the second phase. This is when the faster-moving average goes above the slower-moving one. The golden cross is the point of the new uptrend breakout.
  3. It includes the development of the uptrend. Both MAs support the price that reaches new highs. The continuous growth of prices confirms the bull market, up until the long-term MA crosses above the short-term one.

Death Cross: the opposite indicator

The last stage of the golden cross is when the “Death Cross” occurs. In other words, when the short-term MA plunges under the long-term MA, the chart pattern of a death cross appears. The stages of this indicator are also diametrically opposite to those of the golden cross:

  • During the first stage, the prices are on the uptrend and the MA of the short-term period is still above the MA of the long-term period.
  • The second stage is where the death cross occurs. The short-term MA goes down and crosses the long-term MA, causing the reversal of the trend.
  • The third stage is the development of the downtrend, with the short-term MA staying below long-term MA. Both of the indicators act as a resistance level for the prices.

While both mentioned indicators confirm the beginning of the new long-term trend, death cross signifies that the prices will decline continuously, causing the bear market. Analysts consider it as the point of a sharp prices downturn, especially when high trading volumes accompany it. Thus, for investors, death cross is usually the signal for leaving the market. On the other hand, the point where the golden cross occurs signals the bull market. Predicted upcoming growth of prices is a good reason for entering the market.

Another difference is that after the death crossover, moving averages act as resistance levels. This is caused by the increasing number of sellers that prevent the price from going up.

What is Golden Cross crypto chart pattern?

In terms of 2023 "Golden cross" is the metric that uses data from the past time periods, which creates a “lag” effect. The interest of traders in the golden/death cross patterns definitely increased after the big crash of Bitcoin in 2021. After studying the charts, they revealed that the uptrend usually begins before the occurrence of the golden cross, which is always a missed opportunity for the investors that use it to enter the market. 

Thus, as a lagging indicator, it doesn’t have reliable predictive power and sometimes leads to false positives and whipsaws (fastback and forth reversals). Especially within the crypto market, which is  known for being extremely volatile. Prices can change in a matter of minutes. To take a long-term position efficiently, you need to consider more indicators.

While the golden cross pattern has its limitations,  it’s still impossible to overlook its influence on the market.Golden cross chart patterns work the same for any cryptocurrency on the markets, which makes makes it possible to apply this indicator to crypto trading. Many investors rely on it, while purchasing their assets. Including major and meme coins, supporting the predicted bullish trend. The reaction of the market to the indicator is unavoidable to some extent  — the indicator successfully fulfils itself. 

How to use Golden Cross pattern to overcome its limitations

MAs are one of the most commonly tracked chart indicators in cryptocurrency trading. Their main value is in measuring the momentum of the upcoming up- or downtrend. However, when it comes to relying on golden or death cross chart patterns in the Bitcoin trading game, many traders claim it’s the most efficient way for the long haul.

You should be familiar with the nuances of using the strategy, especially if you’re following the golden cross to get the most value out of it.

Types of moving averages

Let’s take a look at the different types of MAs and figure out how to use all of them efficiently. In fact, the trading results from using the golden cross pattern directly depends on the choice of the right MA.

The main types of moving averages:

  1. Simple moving average (SMA). To calculate it you need to divide the range of prices by the number of periods in the given range. This technical indicator can be used to determine the consistency of the existing trend or identify its reversal. However, it’s not sensitive to the recent price changes, as it doesn’t put more emphasis on recent data.
  2. Exponential moving average (EMA). The main difference of the golden cross EMA indicator is that the newer data has more weight in its calculation. Thus, it’s more sensitive to the price changes of the market. 

The most reliable way to identify the direction of the price trend is to use short-term exponential moving average and long-term simple moving average, more precisely the 50-day EMA and the 200-day SMA. 

According to this strategy, the best point to enter the buy is on the candle after the one that crosses above both MAs. Most trading charts provide the information on both 50 EMA and 200 SMA indicators. 

The example below is 50 Day EMA. If you were using this technichal indicator on the given timeframe,  the chances are your trading would be profitable, as the asset’s price was higher than the EMA most of the time.

Our next example is 200-day SMA. It’s much more smooth, as the name states. Statistically, it’s harder to go down this line, because the frame is longer and gives traders more info to consider. Trading deals using 200-day SMA are less profitable and more reliable, when compared to 50-day EMA. Choosing a risk profile is up to a trader. You can also combine different averages and use advanced technics like crosses.

The definition of the time frame

While some experts claim that the “true” golden cross happens only when the 50-period MA crosses above the 200-period MA, the concept of the chart pattern is what matters the most. In fact, changing the definition of the short and long term MAs is crucial for identifying the price trend direction of such a volatile asset like Bitcoin. In some cases, the 10-day MA may be signaling the upcoming death cross, while the 50-day MA goes above the 200-day MA. Compare moving averages with different time frames to avoid fakeouts, which are especially common on the cryptocurrency markets.

The larger period the golden cross uses, the more obvious is the indication of the strong upward price trend. Shorter periods, starting with 5 minutes, are more commonly used by “day traders”, while longer periods have more value for “swing traders”.

Other crucial indicators

Golden cross has more value in confirming the reversal of the trend that has already happened. It is essential to factor in other technical indicators and filters while making decisions on the market. Here are some of them:

  1. ROI (return on investment). To evaluate the risk of purchasing a particular cryptocurrency;
  2. The capitalization of the market. To gauge the potential development of the market depending on how many investors put money into it;
  3. Volatility of the asset. To use more appropriate time frames;
  4. The volume of the asset in circulation. To estimate the level of liquidity on the market; the higher level of supply of the assets means its higher liquidity;
  5. OHLC prices. Considering open, high, low and closing prices help to evaluate the performance of the asset over the given period of time.

Final thoughts

Golden cross is a chart pattern that happens when a faster-moving average crosses a slower-moving one. It suggests the upcoming bull market with a consistent increase in prices. There are two main types of moving averages and the combination of 50-period EMA and 200-period SMA is the most efficient for volatile markets. 

The indicator relies on the data of previous periods, which leads to the lag effect, meaning that it’s better for confirming the rise of the market rather than for predicting the beginning of the uptrend. The strategy of following the golden cross Bitcoin chart pattern requires factoring in additional metrics and filters if you use it for predicting the reversals of the market.