What Is a Golden Cross Pattern in Stocks? How Do They Form?

By Laurel Tincher · March 09, 2022 · 6 minute read

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What Is a Golden Cross Pattern in Stocks? How Do They Form?

The Golden Cross pattern is a popular candlestick chart pattern used by traders. It is a technical indicator that appears when a security’s short-term moving average rises above its long-term moving average.

It is popular because it is easy for chart watchers to spot and interpret. The Golden Cross doesn’t occur as often as other chart patterns, but when it does it sometimes even makes news headlines because it is a strong bullish indicator for a stock or index.

How Do Golden Cross Patterns Form?

The Golden Cross candlestick chart pattern happens when two moving averages cross, specifically when the short-term moving average rises above the long-term moving average. It is an indicator that the market will probably head in a bullish direction.

A moving average is simply a plot of the average value of a stock price for some trailing period of time. Commonly used moving averages are the 50-day moving average as a short-term measure and the 200-day moving average as a long-term measure.

Recommmended: Important Candlestick Patterns to Know

3 Stages of a Golden Cross

There are three stages that form the Golden Cross pattern:

1.    The first stage of the golden cross happens before the moving average lines cross. A downtrend happens and the short-term average is lower than the long-term average, but buyers volume starts exceeding seller volume.

2.    Next, the cross happens. The short-term moving average crosses over and above the long-term moving average, reflecting an upward trend.

3.    Finally, the trend continues and the price continues to rise, confirming a bullish market. Both moving averages establish support levels and the short-term average remains above the long-term.

What Does a Golden Cross Tell Traders?

When the short-term average is higher than the long-term average, this means that short-term prices are rising compared to previous prices, showing bullish momentum. A sharper trend line for the Golden Cross implies a more bullish indicator.

The candlestick pattern that’s opposite the Golden Cross is the Death Cross, which is when the short-term average goes below the long-term average, indicating a bearish market trend.

Does a Golden Cross Work?

The Golden Cross can be a useful technical pattern for traders to use to spot changes in market trends. However, on its own it has some limitations.

Benefits of the Golden Cross

The Golden Cross can be a good indicator that stock prices will rise. It is known as one of the strongest bullish indicators, and can reflect other positive underlying factors in a particular stock. Furthermore, since the pattern is so widely known, it can attract buyers, thereby helping to fulfill its own prediction.

Drawbacks of the Golden Cross

Like any chart pattern, there is no guarantee that prices will rise following the golden chart pattern. The Golden Cross is a lagging indicator. It shows historical prices, which are not necessarily an indicator of future price trends. Even if prices do rise, they might not rise for long after the Golden Cross forms. Due to these uncertainties, it is best to use the Golden Cross in conjunction with other indicators.

How to Trade a Golden Cross

Both long-term and short-term traders can use the Golden Cross to help them decide when to call their broker and enter or exit trades. It can be used both for individual stocks and for trading market indexes.

Most traders use the Golden Cross and Death Cross along with other indicators and fundamental analysis, such as the relative strength index (RSI) and moving average convergence divergence (MACD). RSI and MACD are popular indicators because they are leading indicators, providing more predictive and real-time information than the Golden Cross lagging pattern.

What Time Frame is Best for Golden Cross?

The most popular moving averages to use to spot the Golden Cross are the 50-DMA and the 200-DMA. However, day traders may also spot the Golden Cross using moving averages of just a few hours or even one hour. Traders enter into the trade when the short-term average crosses over the long-term, and they exit the trade when the price reverses again.

Oftentimes, investors enter a trade when the stock price itself rises above the 200-DMA rather than waiting for the 50-DMA to cross over the 200-DMA, because the Golden Cross is a lagging indicator. If traders wait for the pattern to form they may have missed the best opportunity to enter into the market. Short sellers also use the Golden Cross to determine when the market is turning bullish, which is a good time for them to exit their short positions.

Golden Cross Pattern in Crypto

While the Golden Cross has traditionally been used as a stock and index trading indicator, some crypto traders also use it. In crypto, traders use in the same way as stock traders, generally using the 50-DMA and the 200-DMA.

However, it’s important to remember that crypto assets tend to be more volatile than stocks and other assets. Therefore, the Golden Cross may have less utility for crypto traders than stock traders, since it is a lagging indicator.

One way to make the Golden Cross more useful for crypto is to change the moving averages used. In addition to using 50-DMA and 200-DMA, a trader might look at the 10-DMA compared to the 50-DMA and 200-DMA. This provides a more recent look at the market to see if the Golden Cross is still relevant for current trades.

A trader may actually find that the crypto price is returning to a downtrend, in which case it would not be a good time to buy. Technical patterns are especially popular with crypto traders because there is little else to go on when trying to determine whether a coin is headed ‘to the moon.’ There are no company reports of earnings, debt, or other information that might be informative for traders looking to do fundamental analysis.

The Takeaway

Chart patterns are useful tools for both beginning investors and experienced traders to spot market trends and find entry and exit points for trades. The Golden Cross is one indicator that technical analysts might look at to determine whether a stock or market is bullish.

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Photo credit: iStock/Prostock-Studio

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