The Golden Cross, also called the Golden Cross, is a trading signal within the technical analysis that occurs when a short-term moving average crosses a long-term moving average upwards, indicating a possible bullish trend change. This strategy has gained popularity among investors for its simplicity and effectiveness.
In this article, we will break down how to apply the Golden Cross strategy and what types of assets are most suitable for its application. From stocks to cryptocurrencies, we will learn how this method can optimize our investments.
What is the Golden Cross in trading?
The Golden Cross in trading is a technical trading signal used to identify a potential change in the market trend or the asset in question to be analyzed. This signal is produced when a short-term moving average crosses above the long-term moving average. It is therefore a buy signal that suggests that an uptrend is developing.
This signal means that the uptrend is gaining momentum and suggests that prices will continue to rise. Traders who detect the Golden Cross can then take bullish trading decisions to take advantage of the uptrend.
For example, when the 30-session simple moving average crosses from below the 200-session moving average.
In fact, look at the chart below for the Apple action, in 1-day candles, as the 30-session moving average (purple line), crossed from below the 200-session moving average (green line), confirming a trend, which continued for the following months.
A clear example of the Golden Cross is manual trading.
Therefore, to better understand the Golden Cross, it is important to understand the basic concepts of technical analysis. For this, tools such as moving averages are used to identify patterns and signals in price charts.
A moving average is a technical indicator used to smooth price data over time. This allows patterns to be observed in prices:
- A short-term moving average shows recent prices
- A long-term moving average shows prices from several months or years ago.
It is a very reliable buy signal, as it suggests that an uptrend is gaining momentum. When the opposite happens; that is, the short-term moving average line crosses the long-term moving average line from top to bottom, it is considered a sell signal.
👉 More information: Death Cross Trading
How to Apply the Golden Cross Strategy in Trading?
Let's see how to apply this strategy step by step in a simple way.
Step 1: Choose a Trading Platform
Follow the steps I explain below:
- First, you will need a trading platform that allows the use of moving averages (most of them offer it).
- The next step will be to choose the values of the moving averages. To apply the Golden Cross strategy, you will need to configure:
- A short-term moving average (MA50)
- A long-term moving average (MA200).
- After selecting the values of the moving averages, it is important to understand how the results are interpreted.
When the MA50 crosses above the MA200, it is considered a bullish signal, and a bearish signal when the MA50 crosses below the MA200. These signals can be used to enter or exit a position.
👉 More information: Moving Averages
Step 2: Identify a Bullish Signal
Now that you know how the Golden Cross strategy works, it's time to implement it. The first thing you must do is identify a bullish signal; that is, the MA50 has crossed above the MA200. This is where you can enter a long position to try to take advantage of the upward movement.
Step 3: Exit the Position if the Signal is Bearish
To use the Golden Cross strategy to exit a position, you must identify that the MA50 has crossed below the MA200. This is when you can exit a long position to avoid a possible loss.
Practical Example of Golden Gross Trading
In this example, we can observe an upward cross in the Sp500 between the 50-session and 200-session averages during the months of October and September 2010 (red circle). At the end of June, the uptrend comes to an end with a new downward cross-giving exit during the year 2011. Almost 9 very profitable months in the index.
👉 Do you want to know other trading tools? Discover them in this article: Technical indicators
What assets are most convenient to invest in when a golden cross occurs?
A good way to start is to think about the assets that have an uptrend in the long term.
- Precious metals: For example, metals such as gold or silver. These assets usually have an uptrend in the long term, which means that prices generally increase over time.
- Actions: In addition to assets with a long-term uptrend, it is also a good idea to invest in stocks with a good success story. Choose stocks from companies that have performed well in the past. These companies tend to follow that performance and can offer good returns to investors.
At this point, we can find great help in defensive sector companies such as food or health. So, cases like Nestle (NESN.SW), Walmart (WMT), or Novo Nordisk (NOVO-B.CO), have experienced significant long-term growth, during all their historical stages.
- Stock indices: It is also a good idea to invest in stock indices. These indices generally reflect the overall health of the market, so if the market is in an uptrend, the indices will be too.
- Bitcoin: And look, in this case, I'm talking about Bitcoin, not cryptocurrencies, but Bitcoin. In general, and despite its enormous volatility during the crypto winters, Bitcoin has always maintained a long-term uptrend. And it is not for less, more and more large banks and investment funds, acquire it as reserve guarantees.
Golden Cross: Best Investment Strategy? | Opinions.
Using the Golden Cross as part of your investment strategy can be an effective way to maximize your profits. As we have seen, the Golden Cross also indicates that the market is about to enter a bearish trend, which means you can prepare to sell your stocks before prices start to fall.
There is no guarantee that the Golden Cross will work to maximize your profits, like any other investment strategy. However, if used correctly, it can be a useful tool to help you get the best results. It is worth researching more about the Golden Cross and seeing how it can benefit you.
Pros and cons of using the Golden Cross in trading
Let's look at the advantages and disadvantages of using this strategy:
✅ Simplicity: This strategy is easy to understand and apply, even for the most novice traders.
✅ Efficiency: It is an effective signal to identify trend changes in the long-term market.
✅ Universal application: It can be applied to any asset that has a historical price chart.
❌ Late signals: The Golden Cross can provide late signals, as it needs confirmation of a trend change.
❌ False signals: In volatile markets, it can generate false buy signals, which can lead to losses.
❌ Ineffective in sideways markets: The strategy does not work well in markets with little or no trend.
In short, the golden cross is a trading strategy, nothing more. It can be used as confirmation if we are trend investors, but in any case, we must understand it as one more confirmation signal, but as it happens in trading, nothing that works objectively at 100%.
What are the limitations of the Golden Cross strategy?
The Golden Cross can provide late signals, as it needs confirmation of a trend change. It can also generate false signals in volatile markets, and it does not work well in markets with little or no trend.
What is the difference between a Golden Cross and a Death Cross?
A Golden Cross is a bullish signal that occurs when a short-term moving average crosses above a long-term moving average. A Death Cross is a bearish signal that occurs when a short-term moving average crosses below a long-term moving average.
What are the best assets to invest in when a Golden Cross occurs?
Assets that have a long-term uptrend, such as precious metals, stocks, and stock indices, are good candidates for investment when a Golden Cross occurs.