In golden cross strategies, a lower-valued moving average crosses over a higher valued moving average, indicating a strong momentum in the trend. Though, the challenging factor is to find where to enter the market based on golden cross strategies.
If that’s your objective, then you’re in the right place! After reading through this golden cross trading guide, you will have a deep understanding of what is golden cross in trading and learn a golden cross strategy or two that you can apply to any crypto asset.
What is Golden Cross in Trading?
A golden cross happens when a short-term moving average crosses over a long-term moving average (MA) toward the upside. It is a solid, bullish price direction that works well with most crypto trading assets. The original golden cross trading strategy has its origins in the stock market. The main components of the golden cross pattern include two moving averages:
1. 200-day moving average
2. 50-day moving average
The 200-day MA is regarded as being one of the most popular, while the 50-day MA is a leading moving average.
The Anatomy of a Golden Cross
In the regard to the golden ross, the short-term moving average moves above the long-term moving average, pointing to bullish momentum in the price. Conversely, the death cross happens when the short-term moving average crosses below the long-term moving average. It is simply the opposite of the golden cross.
The moving average represents the overall market sentiment of the trading asset. When the price is trading above the 50 days moving average, the buyers are stronger than the sellers, which generally means bulls have been controlling the market for the last 50 days. So, in this market condition, traders who focus on buy trades have a higher chance of making a profit.
However, what if a short-term moving average crosses above the long term moving average? In that case, it is a clear indication that both short-term and long-term traders are bullish, and after the crossover, short-term traders become more bullish than long-term traders. Since the golden cross indicates that the short-term traders are more substantial where long-term traders are also bullish, you would expect a sharp movement toward the upside from a buy trade.
There are three stages of a golden cross:
- In the first stage, a downtrend ends as selling is depleted.
- Later on, the short-term moving average crosses over the long term moving average.
- Finally, the price continues upside, pointing to an impulsive, bullish pressure.
Golden Cross Strategy
Trading is more practical than having only theoretical knowledge. If you want to get the maximum output from the golden cross, you need to make sure that you are using it perfectly. When using the golden cross strategy, you have to first ensure that the crossover happens and a candle closes above the crossover. Later on, you’ll want to focus on building a trading strategy with an appropriate stop loss and take profit levels.
There are many trading strategies based on the golden cross, and you can make a decent profit from any of these with proper risk management measures in place.
50 EMA Crosses Over the 200 SMA
In a golden cross strategy, the more effective moving average values are the 50 EMA and 200 SMA. Before proceeding to the trading strategy, let’s look at the key difference between SMA and EMA:
The Simple Moving Average (SMA) focuses on the average price of the last number of candles, using the average value. On the other hand, the Exponential Moving Average (EMA) focuses on the most recent prices. Therefore, both EMA with a short-term value and SMA with a long-term value provide the most reliable price direction.
Here is a step-by-step guide to trading the 50 & 200 EMA golden cross:
1. Wait for the price to aim higher by creating a higher high to define the overall price context as bullish.
2. Identify the 50 EMA below the 200 SMA and wait for a crossover.
3. Wait for the crossover candle to close above the two moving averages, and enter the buy trade on the next candle.
4. The stop loss should be below the 50 EMA. The logic behind the stop loss is to consider the trade valid as long as short-term traders are holding the price above the 50 EMA.
5. The primary stop loss would be based on 1:1 risk/reward where you should take some profit and move the stop loss at break even.
6. Later on, the final take profit level would be based on 1:2 risk/reward ratio or near-term resistance level.
A Golden Cross with Double Bottom Pattern
Taking trades based solely on the crossover might not be suitable every time. So what if a golden cross happens, but the price moves downward? You might think this is a false crossover signal, but that’s not the case.
If you don’t want to miss those trades, the golden cross with a double bottom pattern strategy is for you. Put simply, a double bottom is an area where the price makes two equal lows. It indicates that sellers tried to take the price down, but bulls became active at this level to take the price higher. Here is how to take trades based on golden cross with Double Bottom Pattern:
1. Wait for a golden cross to happen with an impulsive, bullish pressure.
2. The price should come down below the 50 EMA but above the 200 SMA, with a corrective speed.
3. Identify the double bottom pattern and wait for a candle to close with a new high to confirm the pattern.
4. Enter the trade as soon as a new bullish candle appears with a higher high.
5. The stop loss should be below the low of the double bottom pattern with some buffer.
6. The first take profit will be based on a 1:1 risk/reward ratio, where you should close 50% of the trade and move the stop loss at break even.
7. Lastly, you can hold the trade as long as possible, but taking total profit at the near-term resistance level would be the best idea.
The double bottom pattern is confirmed once a candle closes above the highest point of this price structure – this also triggers our entry. The stop loss is below the recent low, plus a buffer for extra protection, and the full profit was taken with a 1:2 risk/reward ratio.
Does a Golden Cross Strategy Apply to Crypto Trading?
A golden cross happens when a short-term moving average crosses over a long-term moving average toward the upside. It is a solid, bullish price direction that works well in all financial markets, including the cryptocurrency market. The cryptocurrency market is an emerging one, in which technical analysis works completely fine, just as with the traditional forex or stock market.
Along with other technical strategies, the golden cross is very profitable in the cryptocurrency market. So, the two trading strategies that we have discussed in the above sections are profitable in any crypto pair, and across all time frames. Though, do note that like other trading strategies, the golden cross has some drawbacks. The moving average is a lagging indicator that provides signals after the movement happens.
However, you can quickly reduce the risk by observing what is happening in a higher time frame. If your trade direction matches that of higher time frames, you can consider it as a high probability trade.
Closing Thoughts
We have now come to the end of the golden cross strategy having learnt what is golden cross in trading. Do remember that besides having a profitable trading strategy, you should focus on solid trade management skills.
The cryptocurrency market is very uncertain, and there is a possibility of unexpected market movement at any time. Therefore, make sure you actively manage your trade every time to protect yourself from adverse price reactions.
