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Thread: In-depth Discussion of Golden Cross: Its Uses, Significance, and Limitations

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    Default In-depth Discussion of Golden Cross: Its Uses, Significance, and Limitations




    The Golden Cross

    A bullish signal is formed when a comparatively short moving average crosses over a long-term moving average in a chart pattern known as the golden cross. A bullish breakout pattern generated by a security's short-term moving average (such as the 15-day moving average) breaking above its long-term moving average, like the 50-day moving average, or resistance level is known as the golden cross. The golden cross, which is strengthened by large trade volumes, signals a bull market on the horizon since long-term signs hold greater weight.



    What Message Does a Golden Cross Send?

    A golden cross is made up of three phases. A downtrend must finally bottom out as selling is exhausted in the first stage. The shorter moving average makes a crossover up through the bigger moving average in the second stage, signaling a breakout and confirmation of the trend reversal. The last step is the continuation of the upward trend in anticipation of rising pricing. On pullbacks, the moving averages serve as support levels until they cross back down, at which time a death cross may emerge. The death cross is the polar opposite of the golden cross, in which the shorter moving average crosses the longer moving average.

    The 50-period and 200-period moving averages are the most often utilized moving averages. The period denotes a definite interval of time. Larger time spans likely to produce stronger, longer-lasting outbreaks. On an index like the S& P500, for example, the daily 50-day moving average crossing up through the 200-day moving average is one of the most common bullish market signs. When a golden cross appears as the purchasing echoes across the index components and sectors, the proverb "A rising tide lifts all boats" applies.

    Smaller time periods, such as the 5-period and 15-period moving averages, are often used by day traders to trade intraday golden cross breakouts. The chart's time interval may also be changed from 1 minute to weeks or months. Larger periods provide stronger signals, and the same is true for chart time spans. The golden cross breakout tends to be stronger and continues longer when the chart time period is greater.


    What Is the Difference Between a Golden and a Death Cross?

    The golden cross and the death cross are diametrically opposed. A golden cross suggests a future long-term bull market, whilst a death cross implies a future long-term down market. Both refer to a short-term moving average crossing over a significant long-term moving average as credible evidence of a long-term trend.

    When a short-term moving average crosses over a significant long-term moving average to the upside, analysts and traders see it as a clear upward shift in the market. A death cross, on the other hand, is a comparable downwards moving average crossing that signals a market's definitive decline. When accompanied by a large trade volume, any crossing is deemed more important. The long-term moving average is regarded as a key support (in the case of the golden cross) or resistance (in the case of the death cross) level for the market from that point on after the crossing happens. Either cross may suggest a trend shift, but they're more likely to appear as a strong confirmation of a trend shift that has already occurred.


    The Golden Cross in Three Stages

    The Golden Cross is divided into three stages. The first phase occurs when a downturn exists but is on its final legs due to increased purchasing interest outnumbering selling interest.

    The establishment of a fresh upsurge is the second step. The Golden Cross is formed when the short-term average crosses from below to above the long-term average, signaling the start of a new uptrend.

    The fresh upswing is extended in the final phase, with further increases confirming a bull market. When corrective downwards retracements occur during this period, the Golden Cross' two moving averages should both operate as support levels. The bull market is regarded to be intact as long as both price and the 50-day average stay above the 200-day average.


    What is the best way to exchange the golden cross?


    Using Apple as an example, the 50-day moving average had moved above the 200-day moving average in late 2016, indicating a positive indication. As previously stated, additional indicators are often employed in combination with trend indicators to confirm the trend, and the MACD shows this build-up to the crossing point in this example. As a result, one may continue to trade this trend and exit when the 50-DMA falls below the 200-DMA, as it did in late 2018, albeit one may be better off doing so earlier in the year, given the solid break of the 200-DMA.



    Others may insist that only the 50-DMA and the 200-DMA, like in the example above, produce actual golden crosses. However, it's possible that this is just owing to the popularity of the two moving averages, which confirms their value as indicators. Using the two, chances to notice a trend shift may be few and far between, and it may also be a somewhat lagging indicator, while longer-term investors may find this a useful indicator to supplement fundamental reasons for purchasing the company.

    On a shorter time scale, this may be seen in Apple's four-hour chart, as seen below. When the short-term moving average crosses above the long-term moving average, one may open a buy position and then exit at the opposite or even earlier when prices fall below the long-term moving average. The golden cross strategy, or simply any strategy that employs the crossing of moving averages, may be implemented utilizing algorithms for high-frequency trading.


    The golden cross's validity

    The ability of a technical indicator to function with one stock or asset class, in general, does not ensure that it will work with another. The fact that the golden cross is a lagging signal is one of the most often mentioned issues with it. Historical pricing data does not have the predictive capability to anticipate future price fluctuations. This is why it is commonly used in conjunction with other indicators or fundamental research to help traders make trading decisions.

    Back-testing a golden cross trading strategy across several asset classes, on the other hand, may provide some intriguing findings, and it may be more useful as a technical analysis tool.


    Moving averages tactics with a golden cross


    There is a variety of moving averages, each with its own formula, that may influence when the golden cross occurs on a price chart.

    Definitions and distinctions between Simple Moving Average, Exponential Moving Average, and Volume Weighted Moving Average

    Some traders feel that the MA type you choose has an impact on your golden cross trading success. However, we'll show you that using various Moving Averages isn't the key to trading the golden cross technique successfully. As a result, we established these Moving Averages and their differences before comparing the quality of the golden cross trading signal generated by them.
    • Simple Moving is a term that refers to Simple Moving Average stands for the simple moving average, and its formula is simple to calculate. If the past four candles' closing prices are 25.5, 26, 27.5, and 28, your average is (25.5+26+27.5+28) divided by 4 equals 26.75.

      If you repeat this calculation for more candles, you'll end up with a line in your chart that signifies 4 Simple Moving Average. When the 50 Simple Moving Average crosses the 200 Simple Moving Average, it is known as a golden cross Simple Moving Average.

    • EMA (European Medicines Agency) Golden Cross Exponential Moving Average stands for Exponential Moving Average, and we haven't included its calculation here to avoid any confusion. However, you should be aware that the EMA places a greater emphasis on recent data, which is the fundamental difference between it and the Sample iMA.

      When 50 Exponential Moving Average crosses over 200 Exponential Moving Average, it is known as a golden cross Exponential Moving Average.

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    • Volume Weighted Moving Average is a non-profit organization dedicated to The Cross of Gold. VWMA stands for the volume-weighted moving average, and we haven't included its formula here to keep things simple. VWMA differs from two other Moving Averages in that it places a greater emphasis on candle trading volume.

      A golden cross Volume Weighted Moving Average occurs when the 50 Volume Weighted Moving Average crosses the 200 Volume Weighted Moving Average.


    What Does a Golden Cross Mean When It's Bullish?



    Experts believe the stock might rise 5-7 percent if short-term Moving Average values break the long-term moving averages and stabilize there. The final bottoming out of stock prices may be seen in a golden cross chart before they start shooting higher and steadily above the long-term moving average.

    This degree of stability practically signals that investors are positive on stock prices and anticipate them to stay the same or climb higher. The long-term moving average becomes the price support level in a golden cross, and the cross stays as long as the prices are above the long-term moving average. Positive investor sentiment about a company attracts increased attention and creates buying opportunities at certain levels. Experts believe the bullish phase will stay as long as the two trend lines connect and the short-term Moving Average remains above the long-term Moving Average. The increasing trend in stock prices gains traction as trading volume increases. However, when the short-term moving average falls below the support line, a new technical chart pattern known as the death cross emerges.

    Moving averages are used to distinguish between bullish and negative markets. When markets are bullish, as indicated by a golden cross, traders attempt to purchase even little price drops, whereas when markets are bearish, as shown by a death cross, purchasers sell even little price spikes. Both the golden cross and the death cross may be used as trading methods since traders can simply follow the trends that these two technical chart patterns show.


    Although the Golden Cross may occur during any Moving Average period, the following are the most prevalent combinations:
    • The 50-day Moving Average and 200-day Moving Average are often used together, particularly as a bullish breakout indication in the stock market.

    • To spot an intraday Golden Cross breakout, day traders often employ a shorter time frame, such as a mix of 5-day Moving Average and 15-day Moving Average. The time span chosen might be anything from a few minutes to a few days.

    • Moving Average crossings are typically preferred over the Moving Average Convergence Divergence Golden Cross for analyzing the price movements of a certain item.


    There are three things to keep in mind while employing the Golden Cross:

    • The bullish indication will be strengthened by a Golden Cross accompanied by a large trade volume.

    • The Golden Cross signal becomes stronger and more lasting as the time period lengthens. In other words, the intraday indications created by combining the 50-day MA and the 200-day MA are believed to be superior to the intraday signals created by combining the 5-day Moving Average and the 15-day Moving Average.

    • The Golden Cross indicator on the Moving Average is often utilized with an Oscillator in short-term trading. With the aid of an oscillator, you can more carefully follow the price movement and determine when the uptrend is overbought and then when the downturn has approached the oversold level.


    Trading Strategies for Golden Crosses


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    When is it appropriate to make a financial commitment?

    There aren't many Golden Crosses or Death Crosses that don't have a short-term decline and consolidation phase. The graph above is an excellent illustration of this. Traders will constantly search for proof that the trend has altered, rather than reverting to the prior range, but when should you put your money on the line?


    Adding more technical indications

    It's important to look at additional technical indications as soon as you identify a probable Golden Cross or Death Cross. Because these cross technical occurrences are based on moving averages, they may be late, but significant, signs of a shifting trend. Other technical indications may be beneficial to consider as a result. The Stochastic Oscillator, Bollinger Bands, Moving Average Convergence Divergence, and the Relative Strength Index are all examples of indicators. That's simply a sample of what's available.


    Don't forget about stop-loss orders.

    While technical indicators are useful for traders of short, medium, and long-term futures, stop-loss limits should always be used. Those who want to put money into a "new trend" before it is confirmed are taking a calculated risk. They will likely have more upside potential if the trend is confirmed since they took a higher risk at a lower level. A stop-loss limit would prevent most negatives if the trend faded and the index reverted back to its regular trading range.

    Those that employ the Golden Cross and Death Cross effectively in their financial plans are usually adaptable and quick to respond to change. The more technical signs that suggest a new trend, the more likely you should follow it. However, once the trend has been established, purchasing futures and ignoring the market is no longer an option.


    What is the significance of the name "Golden Cross"?


    The crossover of two Exponential Moving Averages with different periods is the strategy's key signal. Moving Averages have long been recognized as a simple and effective tool for technical analysis. The technique gets its name from the appearance of two Moving Averages crossing on the chart, which resembles a cross.

    A Golden Cross occurs when the fast Exponential Moving Averages crosses the Slow Exponential Moving Average from below, signaling a purchase signal. As a consequence, the market shifts from bearish to bullish. The Death Cross is a reversed sell signal that arises when the Fast Exponential Moving Average crosses the Slow Exponential Moving Average from above. This indicator indicates that the bears are presently outnumbering the bulls, and the market is starting to go downward.


    The Golden Cross' primary laws and idiosyncrasies.


    Because the Golden Cross is a trend strategy, it produces good returns when there is a strong market trend. Normally, we utilize a fast Exponential Moving Average with a period of 50 and a slow Exponential Moving Average with a period of 200 in this method. The commencement of a new trend on the market is signaled by the crossing of these two Exponential Moving Averages and the price breaking out of its flat.

    Daily charts are often used by long-term investors and traders. I advocate utilizing shorter charts for mid-term and short-term trading - 4-hours, 1-hour, 15-minutes. The Exponential Moving Averages' periods 50 and 200 are traditional, but you may use alternative periods if they provide satisfactory results during testing.

    See also: Wide range of InstaForex technical indicators.

    The most sophisticated trading terminals incorporate Moving Averages, which are drawn immediately on the price chart. Moving Averages may be added to the price chart on popular trading platforms MetaTrader 4 and MetaTrader 5 through the Main Menu: In the Insert menu, choose Indicators - Trend - Moving Average. Choose the periods either 50 or 200, the line color and width, and the Moving Average type: Exponential in the settings panel.

    The image below depicts the Golden Cross- Moving Average Setting



    Initiating a purchase transaction.

    When the fast Exponential Moving Average with period 50 (yellow) crosses the slow Exponential Moving Average with period 200 (blue) from below, the Golden Cross indicates a buy signal. You may establish a buying trade just after the cross, with a Stop-loss behind the regional low of the price chart and profit secured at the backward crossing of the Moving Averages.

    Let us add the signals of the Relative Strength Index with a regular period of 14 to make the technique more efficient. Wait for the Relative Strength Index line to go below 50% once the Golden Cross provides us the indication to purchase. Open a buying trade when it rises beyond 50%, with a stop loss just below the local low. After the Relative Strength Index displays a reversal and departs the overbought range, lock in profits (the level 0f 70 percent ).


    Starting a selling business.



    When the fast Exponential Moving Average with period 50 (yellow) crosses the slow Exponential Moving Average with period 200 (blue) from above, it generates a sell signal known as the Death Cross. This might signal the start of a downward trend. You may initiate a selling position once the Moving Average crosses, with a Stop-loss behind the local high on the price chart and profit, locked when the Moving Averages cross again.

    Add the Relative Strength Index with period 14 to discover additional ideal entry opportunities. Wait for a downturn to commence once the Moving Average cross and the Relative Strength Index line goes over 50%. Then start a selling trade when the Relative Strength Index line passes the 50% level from above. When the RSI reverses after a dip and escapes the oversold region, place a Stop-loss behind the local high on the price chart and lock in profit, the level of 30 percent.


    Who will benefit from this strategy?


    The traditional Golden Cross is designed for long-term investors and traders with big investments. The Stop-loss may be rather substantial when you join the market soon when the two Moving Averages cross on 1-day. You'll have to wait a long time for the trend to expire before you can lock in a profit.

    You can't afford significant drawdowns and wait for the daily trend to expire if you trade short-term with a tiny investment. As a result, traders with little deposits should trade for shorter periods of time, use different instruments to identify better entry opportunities with lower risks, and complete trades on time.


    The Golden Cross for Identifying Market Phases


    Trending Phase

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    The Golden Cross acts as a warning indication that we should be on the lookout for the emergence of a bullish bias.

    Before the market swung to support, two pattern extremes were overcome as resistance. The Golden Cross indicated a bullish foundation in the market structure. If you were just looking at the 200 Moving Average bounce, you could have missed the initial flip. The widening presence of different moving averages signaled the market's upward momentum.


    Meandering Phase

    Consecutive Golden Cross and Death Cross crosses at the same price level.

    After an initial surge away from the 200 Simple Moving Average, there was a lack of follow-through. Between the two moving averages, there is a lot of price motion.


    Example #1 - Example of Stock Swing Trading (MCD)
    1. A Golden Cross indicated the beginning of a bullish trend.
    2. Take a look at the intrusions that have occurred below the 50 Simple Moving Average. They were easily rejected by the market.
    3. Following the Golden Cross indication, a healthy difference between the two moving averages was maintained. It was an indication of how strong the bullish trend was.
    4. With the Golden Cross signal, we are not seeking to join the market. Instead, we start trades using price action formations. The bullish signals that are against its climax (green arrows) are performed effectively in this scenario.


    Example #2 - Example of Forex Hourly Trading (USD/CHF)

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    1. Although a Golden Cross developed here, the price movement that followed was sluggish.
    2. The apex of the first push was represented by a dotted line above and away from the 200 Simple Moving Average. The confirmation of a trending phase requires the clearance of this price level. The trading market, on the other hand, hovered at this point. However, this market piqued our curiosity since the 50 Simple Moving Average remained comfortably above the 200 Simple Moving Average.
    3. The market moved away from its sideways consolidation as a result of this positive impulse. The bullish pattern has been established.
    4. Consider the three pullback areas formed by the moving averages. There was a lot of sideways movement in the first two. However, the most recent retreat was roundly rejected. The quick bullish reversal that ended the retreat confirmed this. The rising trend was confirmed.
    5. It began searching for price action pattern entrances once the bullish trend was established. These lengthy Pin Bar configurations seemed like a good fit.


    The Golden Cross Has Its Limitations
    • The limits of the golden cross are the same limits that apply to any technical analysis. To begin with, all technical indicators, including this one, are lagging indicators. These indicators are signs seen in a securities or wider market based on recent and present movements. No lagging signal can precisely forecast future events, as cautious investors understand. Technical analysts' detractors often point out that technical indicators are useless in forecasting future movements since they only explain what has already happened. Because we're interested in future movement, if this is correct, there's no purpose in doing technical analysis.

    • However, some of the most prominent arguments are rebutted by proponents of technical analysis. Some technical analysts like to point out that one of the benefits of employing technical analysis is that it is unconcerned with the corporation that owns the stock. The investor or trader may just concentrate on the stock charts and movements by eliminating any emotion, attachment, or prejudice toward the firm. This concentration may lead to less emotional trading and greater results.

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    • No indication can accurately forecast the future since they are all "lagging." Many times, an observed golden cross generates a misleading signal, and a trader who enters a long position at that moment may find himself in immediate difficulties. Golden crosses, despite their apparent predictive capability in anticipating previous huge bull markets, fail to appear on a regular basis.

    • As a result, before entering a trade, a golden cross should always be validated with additional signs and indicators. The key to properly use the golden crossalong with other filters and indicatorsis to always employ the appropriate risk criteria and ratios. Remembering to maintain a good risk-to-reward ratio and carefully timing your transaction might provide greater profits than mindlessly following the cross.


    Some Frequently Asked Questions Pertaining Golden Cross

    • On a chart, how can you see a golden cross?

      When a short-term moving average crosses over a significant long-term moving average to the upside, analysts and traders see it as a clear upward shift in the market. It is defined by some analysts as a crossing of the 100-day moving average by the 50-day moving average, while others describe it as a crossing of the 200-day moving average by the 50-day moving average. The short-term average grows quicker than the long-term average until it coincides.

    • What does a golden cross signify?

      Due to the delay, however, it is difficult to discern if a signal is false until it has happened. A golden cross is often used by traders in combination with other indicators to confirm a trend or suggestion.


    • Is it true that golden crosses are trustworthy indicators?

      A golden cross is a lagging signal that seems to be dependable since it is only recognized after the market has climbed. But, because of the latency, it is impossible to tell whether a signal is incorrect until after it has occurred. Traders often employ a golden cross in conjunction with other indicators to validate a trend or indication.



    Last Thoughts

    When a short-term moving average crosses over a long-term moving average, it is known as a golden cross. When a short-term moving average crosses below a long-term moving average, it is known as a death cross. Whether it's the stock market, forex, or cryptocurrency, they may both be utilized as dependable methods for verifying long-term trend reversals.

    When a 50-day moving average crosses over the 200-day moving average, it is considered a positive indication. Due to the whipsaw impact of price, trading moving average crossings might result in a streak of losses. Because your exit is the reverse cross or death cross, you spend very little time handling the transaction. Trading utilizing the golden cross as a multiple time frame trend tool along with normal price patterns may be a better way to proceed.

    For trading reasons, some traders may look at considerably shorter frames. Some traders, for example, may compare a 5-minute moving average to a 20-minute moving average and execute day trades based on such golden cross movements. When compared to the usual 50-day and 200-day golden crosses, this is a very different scenario, particularly when looking at the wider market. The golden cross indication is a popular stock indicator, but it's also a popular broad market indication. Almost all investors and traders take notice when the S&P 500's 50-day moving average crosses over the 200-day moving average, forming the golden cross for this broad market index.




    Though trading on financial markets involves high risk, it can still generate extra income in case you apply the right approach. By choosing a reliable broker such as InstaForex you get access to the international financial markets and open your way towards financial independence. You can sign up here.


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