What Is a Golden Cross?

A golden cross is a technical indicator in both traditional and crypto trading, which occurs when a short-term moving average crosses above a long-term moving average. Typically these averages are the 50-day moving average and the 200-day moving average. 

The cross is described as “golden” as it can be a strong indication that an asset’s price is about to increase. While the future performance of any asset is never guaranteed, the forming of a golden cross serves as proof that short-term price trends have become more positive in comparison to longer-term price trends. 

Crypto golden crosses in crypto trading can differ from those in traditional trading as shorter averages are typically used to account for crypto’s comparatively greater volatility. For example, some crypto traders will look for golden crosses in time periods as short as the 20-hour and 50-hour moving averages. The principle remains the same however, in that it indicates short-term performance being stronger than long-term performance.

How Do Traders Use the Golden Cross? 

Primarily, traders use the golden cross as a means of confirming trends and signalling the possibility of imminent positive price movement. However, there are a number of different ways upon which they can be acted. . Some traders will take the formation of a cross as a signal to enter a position, while others will interpret it as a sign to wait for a price pullback, in order to enter at a lower price. 

Golden cross-detection can also be implemented into automated trading orders such as stop losses or profit takes, to potentially increase the success rate of a trading strategy. In doing so, traders using automated trading strategies can reduce the chance of their systems picking up false positives, and can prevent falling foul of “ whipsawing,” when an asset’s price bounces up and down. Institutional traders will also typically take note of forming golden crosses as an indication to reallocate portfolios or adjust strategies. 

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What Are the Limitations of the Golden Cross? 

Despite being a useful trading metric, a golden cross is no guarantee of any trend. It confirms only what has happened in the past and merely suggests what might be likely to happen in the future. As cryptocurrency can be a highly volatile asset, the golden cross shouldn’t be solely relied upon as an indication of future gains or profits. When deciding to take action on a golden cross, it’s better to confirm the trend with other positive indications, with metrics such as volume or indicators like Relative Strength Index (RSI). 

The golden cross is also typically more significant when viewed on longer-term charts such as daily or weekly, rather than hourly. When a cross forms using short term moving averages, it might simply be ‘trading noise’ and not indicative of a reliable trend. Longer term moving averages allow a more robust trend to be confirmed, meaning that more confidence can be placed in it.

Understanding golden crosses can be useful for identifying trends in previous price movements of an asset, and typically confirms a bullish trend in the given timeframe. However, it’s important to remember that in volatile markets such as cryptocurrency, other context for trends should be taken into account as well. If utilized cautiously, and understood not to be a guarantee of performance, it can serve as another useful tool for crypto price analysis and trading.

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