Today, I will share an important technical analysis technique - the golden cross. The golden cross is a key technical signal in trading that helps investors find precise entry points and improve trading performance. Next, let’s delve into this technical signal and its applications.
What is a golden cross?
A golden cross refers to the point where a short-term moving average crosses above a long-term moving average. For instance, when the 50-day moving average crosses above the 200-day moving average, a golden cross is formed. This signal is generally seen as an important indicator of an upward market trend. Conversely, when the short-term moving average crosses below the long-term moving average, it forms what is known as a 'death cross', which often signals that the market trend may turn downward.
In actual trading, the choice of moving averages can be adjusted based on individual trading styles and periods. Short-term traders may choose moving averages with smaller parameters, while long-term investors may prefer using moving averages with longer periods.
Applications of the golden cross
The formation of a golden cross usually indicates that the price is in an upward trend, and the subsequent trend is bullish. However, blindly going long based solely on the golden cross signal is not enough, as the price may be in a sideways consolidation range, leading to frequent stop losses. Therefore, we need to combine other technical analysis tools to improve the success rate of trades.
1. Trend judgment on larger time frame charts
First, we can observe the golden cross signal on a larger time frame chart to determine the overall trend direction. For example, if we see the 50-day moving average crossing above the 200-day moving average on the daily chart, it indicates that the price is in an overall upward trend. At this point, we can look for entry points to go long, trading with the trend to maximize potential gains and profits.
To further confirm the reliability of the golden cross, we can analyze it in conjunction with the trend structure. For example, if the price forms a 'higher highs, higher lows' upward trend structure and simultaneously displays a golden cross signal, this will further confirm the upward trend of the price.
2. Selection of entry price levels
After confirming the overall trend, we need to look for specific entry price levels. One method is to wait for the price to pull back near the 50-day moving average. The 50-day moving average is usually an important support level, with significant bullish momentum, and the price may rebound upwards here.
However, we cannot trade based solely on the 50-day moving average. To improve the win rate, we also need to combine other technical signals, such as support and resistance levels. For example, if the 50-day moving average is located at a resistance-support flip level, and that price level has been tested multiple times and confirmed effective, then this will be a high-quality entry point.
3. Analysis of entry time frame charts
On the entry time frame chart, we need to look for specific chart patterns formed by the price at key levels. For example, if the price forms a double bottom pattern when pulling back to the 50-day moving average, it indicates that the price is bottoming out at the key level, and there is a high probability it will rebound upwards thereafter. At this point, we can enter long when the price breaks the neckline of the double bottom, with the stop loss set below the double bottom pattern and the key price level.
Practical case analysis
Uptrend case
Assuming the price forms a golden cross on the daily chart and the trend structure shows 'higher highs, higher lows', this indicates that the price is in an uptrend. We can wait for the price to pull back to the 50-day moving average, and combined with support and resistance analysis, confirm the validity of the key price level. If the price forms a double bottom pattern at the key price level, we can go long when the price breaks the neckline of the double bottom, with the stop loss set below the double bottom pattern, and the take profit point can be set based on the stop loss ratio, for example, the take profit point is three times the stop loss point to achieve a risk-reward ratio of 3:1.
Downtrend case
Conversely, if the price forms a death cross and the trend structure shows 'higher highs, lower lows', it indicates that the price is in a downtrend. We can wait for the price to pull back to the 50-day moving average, and combined with resistance level analysis, confirm the validity of the key price level. If the price forms a bearish chart pattern (such as a large bearish candle breaking the key price level) at the key price level, we can short after the large bearish candle fully forms, setting the stop loss above the key price level plus one ATR value to avoid false breakouts.
Take profit techniques for golden crosses
The golden cross can help us determine the trend direction and entry points, and it can also be used for taking profits. For example, when the price forms a golden cross, we can go long and hold until the 50-day moving average crosses below the 200-day moving average (forming a death cross). In this way, we can capture the profits from the entire upward trend of the price.
Summary
The golden cross is a powerful technical analysis tool that can help investors determine the market trend direction, find entry points, and set take profits. However, relying solely on the golden cross signal is not enough; we need to combine it with trend structure, support and resistance levels, and chart patterns on entry time frame charts to enhance the success rate and profit potential of trades. If you can skillfully apply the golden cross technique in analysis, your trading level will significantly improve.