Golden Cross Pattern Function:
One of the most common bullish signs for cryptocurrency traders is a golden cross, but this does not automatically imply that you should enter the market.
Due in large part to its outstanding success rate in traditional markets, a golden cross pattern on the charts thrill cryptocurrency traders for its promises of lucrative chances to come.
In contrast to the bearish death cross pattern, the golden cross tends to come before long-lasting uptrends. For instance, since 1970, the S&P 500 has typically returned gains of roughly 15% in less than a year following the occurrence of a golden cross.
The track record of the golden cross in terms of the cryptocurrency asset Bitcoin is equally impressive. Notably, since 2010, the signal has appeared seven times on the daily Bitcoin charts, five of which have resulted in extremely strong bull runs.
A golden Cross Pattern: What Is It?
Before talking about the golden cross, let’s talk about its fundamental element, known as moving averages (MAs).
A moving average captures the average price movement for an asset over a given period. They are calculated mathematically by adding a group of prices (recorded over a specific period, such as hourly, four-hourly, daily, weekly, or monthly), then dividing the result by the total number of prices in the group.
Examples of moving averages
The 50-day moving average, which serves as the short-term MA, and the 200-day MA, which serves as the long-term MA, are the two moving averages that golden cross watchers typically concentrate on.
A golden cross pattern is created when the short-term MA crosses above the long-term MA. In other words, the pattern indicates that, relative to the preceding 200 days, buying interest in a specific market has increased over the last 50 days.
How do golden crosses function?
Traders interpret golden crosses as buy signals since they frequently precede substantial price rallies in both traditional and cryptocurrency markets.
BTC/USD daily price chart with a golden cross in March 2020 and a subsequent surge of almost 750%. the TradingView website
However, there have been instances where phoney breakouts followed golden crosses. Therefore, before making a choice, one should consider the golden cross pattern in addition to other technical indicators.
To begin with, traders might use the relative strength index (RSI), a momentum oscillator that identifies overbought and oversold levels for an asset, to anticipate probable price pullbacks.
This tactic prevented many traders from suffering larger losses in February 2020. See, why will we?
Bitcoin’s 50- and 200-day MAs created a golden cross on February 1, 2020, when it traded for about $9,500. After a brief euphoria, the price increased to as high as $10,500 over the next two weeks. Additionally, throughout that time, Bitcoin’s daily RSI increased above the overbought level of 70.
Due to its overbought state, Bitcoin fell to near its 50- and 200-day moving averages (the $8,500–$9,200 area). However, it eventually fell below $4,000 as March rolled around, coinciding with a global market crash brought on by the start of the COVID-19 epidemic.
The case study illustrates that predictions of future trends using golden crosses are not always correct. Instead, they might support analysts and traders using fundamentals and momentum indicators to predict short- and long-term price movements.
These momentum indicators could include the Average Directional Index (ADI), Stochastic RSI, Rate of Change (ROC), Moving Average Convergence Divergence (MACD), and others.
In other words, investors are cautioned against buying into a golden cross formation too soon. Instead, they could wait until the stock settles into a sideways or downward consolidation and encounters short-term support.
In choppy market conditions, shifting moving averages can change what constitutes a “golden cross.”
I am using the 50-period MA for the long-term MA and the 20-period MA for the short-term MA, for instance. As illustrated below for the bull run from March 2020 to November 2021, the 20-50-day MA combination has traditionally assisted traders in identifying short-term trends in the cryptocurrency market.
Golden crosses do not always guarantee gains:
Golden crosses commonly show before significant price surges in the Bitcoin and cryptocurrency markets, but there is still a chance that bulls will fall victim to a trap.
Finally, traders should exercise caution when using crossover signals because heedless reliance on them could lead to losses. False signals can appear, as mentioned previously; thus, verifying any golden cross with different technical indicators is crucial before entering any trades.