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Table of Contents:
- Golden cross pattern stages and characteristics
- Golden cross vs. death cross
- Golden cross limitations
- Golden cross trading strategy
- The bottom line
Chart patterns are popular among analysts and are used, along with other indicators, to anticipate changes in the stock market. Just as with the cup and handle pattern and the head and shoulders pattern, investors use the golden cross pattern to help them identify trends.
Of course, things often don’t turn out as expected. Investing is risky on even the best day. To have any chance of success, you need all the information you can get.
What is a golden cross pattern? It’s when a short-term moving average pattern crosses above a long-term moving average pattern. It’s considered to be a breakout pattern leading to a bullish market due to its upswing. It originates as a stock’s short-term moving average, such as a 50-day moving average, crosses over a longer-term average, such as the 200-day moving average.
Assuming each day is weighted equally, a golden cross pattern for a 50-day and 200-day moving average is exactly when the average price over the last 50 days moves above the average price over the 150 day before that. This is a comparison of what the price was recently (~25 days ago) to what the price was a while ago (~125 days ago), which means the golden cross pattern is a lagging indicator.
Long-term averages tend to be more reliable. The formation of a golden cross may indicate a bull market is brewing.
- Being able to identify chart patterns can help when learning how stocks work.
- The golden cross stock pattern is a pattern that can point to a possible upswing in the market.
- The golden cross pattern is when a short-term moving average pattern crosses above a long-term moving average.
- A golden cross’s opposite is called the death cross, which is when the short-term average drops below the long-term average, potentially signaling a downswing in the stock or overall market.
Golden cross pattern stages and characteristics
There are three stages of the golden cross chart pattern.
- Stage 1 shows a stock price downtrend.
- Stage 2 is when a short-term moving average crosses over a long-term average and breaks out of that trend as a reversal becomes likely.
- Stage 3 (which may not happen even if the first two have) is marked by a continued uptrend as stock prices rise.
Moving averages may form a reversal at some point and may lead to what is known as a death cross, which is the opposite of the golden cross. The death cross is defined by the short-term moving average dropping below the long-term average, indicating that a bearish market may be on the horizon.
Traders use moving averages as part of their investment strategy. They are based on time periods of 15, 20, 30, 50, 100, and 200 days and are dependent on certain goals and objectives.
Popular moving averages among analysts and traders are the 50-day and 200-day moving averages. This is because there are 50 trading days in a quarter and 200 trading days in a year (since holidays and weekends aren’t trading days). The belief is that longer trading periods illustrate stronger market signals, whether they are bullish or bearish.
Golden cross vs. death cross
Similar to how the head and shoulders pattern and the reverse head and shoulders pattern are opposites, the golden cross vs. death cross also represent exact opposites. The crossover in an upswing suggests a bull market, whereas the crossover in a downward direction suggests a bear market.
While they each show a crossover from a short-term moving average to either an upward trend or downward trend, both the golden cross and death cross signal the future occurrence of a long-term trend in the direction of either a bullish or bearish market.
Golden cross limitations
In order to have a chance to profit from the stock market, you need more than charts and tips on how to analyze patterns. Knowing what is happening in the real world is key to understanding what the stocks are corresponding to. Use charts and patterns to confirm or refute your observations. And remember, the market is fickle and you can still suffer painful losses no matter how strategic you are.
Just remember: No pattern can accurately tell you about the future. In fact, even patterns that tell you about the recent past are going to be affected by noise. For example, Sam inherits a lot of money. Sam also happens to be fond of a particular mobile phone manufacturer. He decides to invest all his money in this company’s stock. This will cause a blip in the chart, but this blip doesn’t tell you anything. And, on a long enough time interval, these blips should largely cancel out.
Restricting to more recent data means restricting insight to a shorter time interval, which means noise will be more of a problem. This leads to a trade-off: The more accuracy you want, the more lag you have to accept.
To use the golden cross chart pattern, investors might want to implement additional investment tools. This might include considering market conditions and paying attention to favorable risk-to-reward parameters and ratios, which can be helpful when making the choice to invest.
Golden cross trading strategy
The golden cross pattern chart can offer traders insights into optimal times to jump into the market or get out, as well as help navigate the fluctuations as they happen. The patterns are risky to use because, like any investing strategy, there is no guarantee of success.
Traders have different ways to strategize, and with the golden cross, some may opt for the more popular 50-day or 200-day moving averages. Others may decide that shorter timeframes will provide better results. Like all patterns, the golden cross chart pattern isn’t static, so a market analysis may be necessary to confirm their position.
As a result, many investors choose to utilize momentum indicators like the average directional indicator (ADX) and the relative strength index (RSI). The ADX can be utilized to spot and measure the overall strength of a trend, and the RSI is a momentum indicator that measures current price changes and assesses overbought and overvalued stocks.
For those who want to use the golden cross, the question remains, how can it be used effectively? These strategies may help.
- Identify setups after a long downward trend. Keep an eye on stocks that have been trending down for an extended period of time. These can reverse the trend and crossover in an upward trend, showing the golden cross pattern. This signifies the potential to move into a bullish market.
- Take notice of wide spreads of moving averages. When trends shift up and down frequently, it’s challenging to pinpoint chart patterns. The shifting highs and lows make them unpredictable at best.
The bottom line
A golden cross may indicate a long-term trend toward a bull market, whereas the death cross may indicate a bear market trend. A crossover is considered more meaningful when coinciding with high trading volumes.
When a cross happens, it may signify a change in the trend. However, sometimes, due to the lag, the trend has already taken place, and the cross signifies a confirmation the change has already happened.
There are a variety of different patterns that may offer educated investors opportunities in the market, such as the bull flag pattern, bear flag pattern, shooting star, and a variety of others. However, they all come with a mixed bag: risks of loss as well as the possibility of gains. This is why understanding the patterns thoroughly is recommended before trying them out.
A great way to learn more is to observe the market in real time during the stock market hours of operation, which are from 9:30am to 4:00pm Monday through Friday. Pay attention to how quickly stock prices can change to get an idea of how unpredictable they are.