Today we will introduce a pure technical indicator: the golden cross. When this indicator was first discovered, crypto trading was not yet popular, and it was mostly used for stock trading. However, with the popularity of online investment transactions and the rise of crypto trading, the golden cross is enjoying a renaissance.
What is the golden cross?
To put it very simply, the golden cross dictates that when the 50 moving average crosses above the200 moving average on a daily chart, the market is entering a bullish zone and therefore traders should consider long positions.
And indeed traders use the golden cross to identify bull markets and adopt corresponding trading strategies. However, it is important to remember that the golden cross itself is not a trading signal. It does not provide an entry point but only indicates that the market has entered a bullish zone, and traders need to find the trading settings themselves.
A classic golden cross can be calculated using the following elements:
1) Daily chart
2) 200 moving average
3) 50 moving average
The daily chart used to be a key element of the golden cross strategy. As mentioned earlier, the Golden Cross is a fairly old indicator. When it was discovered, information technology was not well developed, and most traders tended to use daily charts.
Today, traders can use five-minute or even one-minute charts to trade golden crossover strategies, while swing traders may look at 1-hour or 4-hour charts.
Notice that the 200 moving average is also referred to as the origin of the moving average. This is because if the period of the moving average exceeds 200, it will become flat, meaningless. The 50 moving average is more "flexible", closer to price action, and moving faster.
Also bear in mind that like many technical indicators, moving averages have a certain lag. Therefore, this means that when the golden cross appears on the chart, the market is actually rising.
Some people may think that the Golden Cross is outdated, but statistics show that the winning rate of the Golden Cross is higher than 70%. In a 1-year time frame, the average return of the Golden Cross is about 11%.
Golden cross trading strategy
Now that we have introduced the golden cross, let's take a look at how to trade with it. The following is the daily chart of EURJPY. The blue line represents the 200 moving average, and the red line represents the 50 moving average.
There is a golden cross in the chart, where the 50 moving average rises to the 200 moving average and crosses MA (200) above.
In our chart, the price rose from 112 to 120, but the rebound was still relatively small compared to the previous bear market.
Buying at a low point after an upward trend is a very common trading method because the slower moving average can be used as support at this time, and the price is less likely to fall temporarily. When the price falls to this average, you can consider entering the market.
In foreign exchange as well as crypto, risk control is essential.
After choosing the entry point, we need to set stop loss and take profit, which constitutes the basics of risk control. In our case, the market directly broke through the support of the long term trend of 200-day moving average. We can set a stop loss based on the 50-day moving average. First, mark the straight-line distance between the 200 moving average and the 50-day moving average on the entry position, which is the two horizontal lines in the image below, assuming the distance is D. Then, set the stop loss at a distance D below the 200 days moving average.
After setting the stop loss, you need to consider your take profit, which should be in line with your risk/reward expectations. (Typically a 1:2 or 1:3 ratio, but this depends on the strategy being followed.) We can set the take profit to two to three times the distance from the entry point to the stop-loss point.
Exit the market
In the above figure, the leftmost purple box is the golden cross. At this time, the 50 moving average exceeds the 200 moving average, indicating that the price has started to rise. After a temporary decline, the market quickly rebounds above the 50 moving average - the first purple box - establishing a bullish market trend.
Generally speaking, when the price slowly falls and approaches the 50 moving average support, it means that the upward trend is gradually weakening (the second and third purple boxes). Experienced traders generally only wait for this situation to manifest twice, and will be ready to leave the market by the third time the price touches down.