What is a Golden Cross?
A golden cross is a bullish chart pattern that forms when a short-term moving average (MA) line crosses above a long-term MA line on an asset’s price chart.
MA is a technical indicator that appears as a smooth line on an asset’s price chart. These lines can be configured so that they track the price loosely or closely depending on what period of time is used. The shorter the period, the fewer previous daily prices are used to calculate the MA line. The longer the period, the greater the number of previous daily prices are used to calculate the MA line.
Shorter-term MAs provide a more recent snapshot of a cryptoasset’s price action vs. longer-term MAs – allowing for multiple MA lines to be overlaid on the same chart, helping traders interpret short-, mid- and long-term changes in market sentiment and direction.
The 50-day MA and 200-day MA are widely used by technical traders. Candlestick charts, which show a cryptoasset’s daily price action over a specific time period, are typically analyzed using daily, weekly or monthly intervals.
Many traders believe longer-duration MAs deliver more reliable confirmations than shorter-term MAs since they reflect a greater amount of information over more time. This provides a more sustained gauge of market sentiment and long-term buyer conviction.
A golden cross pattern occurs in three steps:
- The market trends upward after a prolonged downtrend. The shorter-term (typically 50-day) MA begins to rise at a faster pace than the longer-term (typically 200-day) MA.
- The 50-day MA crosses above the 200-day MA.
- This crossover often signals a 50-day increase in bullish sentiment which is sufficient to control near-term price action and supersede the less bullish 200-day trend.
The golden cross pattern is a lagging indicator — it can only be confirmed once the price action required to create a golden cross has already happened. Because of this certainty, technical traders view the golden cross as among the more reliable chart patterns to guide their trading decisions.
What Does a Golden Cross Tell You?
A golden cross indicates that short-term price increases (a positive and rising 50-day MA) may have the potential to reverse a longer term price downtrend (a still-negative, but slowly reversing 200-day MA).
When the 50-day MA crosses above the 200-day MA, a golden cross is formed on a chart. It shows 50-day upside trading momentum is increasing in a cryptoasset or market compared to its previous 200 days. A trade placed based on a golden cross is a bet that the shorter-term buying which is driving prices higher will be sustained and lead to a new bullish cycle.
How to Interpret a Golden Cross
A golden cross signals a bullish reversal to technical traders. When one occurs, or is about to occur, it’s common to see traders close short positions and turn bullish.
Golden crosses tend to be more reliable indicators in less volatile market conditions. In choppy markets where prices spike and plunge on a regular basis without sustained price movement in either direction, the 50-day MA and the 200-day MA may move above and below each other many times over days and weeks.
While this price action may form the literal definition of a golden cross many times as significant volatility causes the 50-day MA and 200-day MA to repeatedly cross each other, an investor needs to ask themselves why this chart action is happening.
Is the 50-day MA indicative of sustained cryptoasset-specific buying activity that is the primary driver of a golden cross’ predictive use? Or is the cryptoasset’s price following a larger market trend as high volatility sends many other cryptoassets on a similarly chaotic ride?
The larger market context and the chart duration of a golden cross both matter. A golden cross that takes months to form and is confirmed with strong follow-through buying provides meaningful long-term information to a trader that golden cross patterns formed over shorter periods cannot.
As with all technical indicators, a golden cross is a statistical chart representation that depicts ongoing decision-making by buyers and sellers. It can provide insight into an asset’s current market dynamics and how they may be evolving – information that can help you decide how to trade.
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