What is a golden cross pattern and how does it work?

A golden cross pattern on the charts excites crypto traders for its promise of profitable opportunities ahead, largely due to its impressive success rate in traditional markets.

The golden cross tends to precede sustained uptrends unlike the downtrend death cross pattern. For example, since 1970, the S&P 500 has been return of approximately 15% gains on average in less than a year after the appearance of a golden cross.

The golden cross record in the benchmark crypto asset Bitcoin (BTC) is equally impressive. Notably, the indicator has appeared on Bitcoin’s daily charts seven times since 2010, five of which led to massive bull runs.

What is a golden cross pattern?

Before discussing the golden cross, let’s talk about its main component known as the moving averages (MA).

A moving average records the average change in the price of an asset over a given period. Mathematically, they are measured after adding a set of prices (recorded within a fixed time frame such as hourly, four hours, daily, weekly, monthly, etc.) – and dividing the sum by the number of prices in the set.

Traditionally, golden cross watchers focus on two specific moving averages: the 50-day moving average, which becomes the short-term MA, and the 200-day MA as the long-term moving average.

A golden cross pattern forms when the short-term MA crosses above the long-term MA. In other words, the model shows that buying interest in a particular market has increased over the previous 50 days compared to the previous 200 days.

How does a golden cross work?

Golden crosses usually precede significant price moves in the traditional and crypto markets, which is why traders perceive them as buy signals.

But there have been instances where gold crosses have been false breakout tracking. Therefore, one should consider the golden cross pattern alongside other technical indicators before making a decision.

To get started, traders can use the relative strength index (RSI)a momentum oscillator that determines overbought and oversold conditions of an asset, to predict potential price declines.

Related: What is a Doji candle pattern and how to trade with it?

In February 2020, this strategy may have helped many traders avoid bigger losses. Let’s see why.

February 1, 2020 Bitcoin’s 50 and 200 Day MA formed a golden cross when it traded for around $9,500. Modest euphoria followed and the price hit $10,500 over the next two weeks. The period also saw Bitcoin’s daily RSI breach its overbought threshold of 70.

Bitcoin Overbought Conditions led to declines towards its 50- and 200-day MA (the $8,500-$9,200 range). But its price finally crashed below $4,000 entering in March, in line with a global market crash caused by the onset of the COVID-19 pandemic.

The case study explains that the golden crosses are not 100% accurate in predicting future trends. Instead, they could simply help traders and analysts by using momentum indicators as well as fundamentals to predict short-term and long-term price action.

These momentum indicators could include Moving average Convergence Divergence (MACD), Stochastic RSIrate of change (ROC), average directional index (ADI) and others.

In other words, traders are advised not to buy too early in a golden cross formation. Instead, they could wait for the price to consolidate sideways or decline and find short-term support before deciding to enter a trade.

It is also possible to change the definition of a golden cross in volatile market conditions by changing the moving averages.

For example, using the 20-period MA for the short-term MA and the 50-period MA for the long-term MA. The 20-50 day MA combination has historically helped traders determine near-term crypto market trends, as shown below in the bull run from March 2020 to November 2021.

Golden crosses do not mean guaranteed winnings

While golden crosses frequently appear ahead of big price moves in the Bitcoin and cryptocurrency markets, the risk of bulls falling into a trap remains.

Ultimately, traders need to be careful with cross signals because following them blindly could result in losses. As stated above, false signals can occur and it is important to confirm any golden crosses with additional technical indicators before making trades.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.