The Golden Crossover is an event when the short-term moving average (simple or exponential) crosses over the long-term moving average. This event markes a shift in the price trend from negative to positive (bullish trend starts) when the first crossover happens.
It is used to predict the shift in price trends i.e., from bullish to bearish.
The opposite of this strategy is called a Death Crossover. The death cross happens when the short-term average goes below the long-term average. This marks the start of a bearish trend.
Traders initiate a long (bullish outlook) trade when they either see a golden cross happening or expect one to take place soon. Below is a reference image for a golden crossover.
In the above image, the golden cross happens when the short-term moving average (20 SMA) moves above the long-term moving average (50 SMA). The golden crosses are marked with blue arrows in the image.
The Golden Cross strategy relies on an increase in momentum in the short term, which leads to a higher short-term moving average. Let us understand it with an example.
Suppose the price of any cryptocurrency is in a trend (up, down or sideways).
If the price increases by a certain percentage, it will surely increase the moving average as the latter is derived from the former.
This increase in moving average would result in a situation where the short-term moving average moves higher at a greater pace than the long-term.
Ultimately, the short-term moving which is the average of the last 20 days of closing price, would cross the long-term moving average which takes the average of the last 50 days' closing price.
There are basically three stages of a Golden Cross. The trend stage, the crossover, and the post-crossover stage.
The Trend Stage is where the price is already in a past trend but slowly the price momentum becomes neutral and then reverses direction. In this stage, the gap between the short-term and the long-term moving averages becomes narrow. At this stage, the short-term moving average is lower than the long-term moving average.
The Crossover Stage is where the gap between the short-term and the long-term is finished and the short-term moving average moves above the long-term moving average. This move is called the Golden Cross. Most traders enter a bullish trade at this stage.
The Post-Crossover Stage is when the short-term moving average is already above the long-term moving average. At this stage, the price momentum is in an uptrend and a rally begins soon. At this stage, it is almost certain that there will be a rally.
The simple moving average is the average of the last "x" days of closing prices. For example, if the simple moving average is SMA20, it shows that the average of the last 20 periods (e.g., hours, days, weeks, months, etc.) of the closing price has been taken. For perpetual markets like crypto, the closing price of the period's candle is calculated.
In Golden Cross, the following simple moving averages are commonly used:
SMA20
SMA50
SMA200
Sometimes, they are also denoted as DMA which means Daily Moving Average.
The exponential moving averages are obtained by applying a multiplier to the simple moving averages.
EMA= Price(t)×s + EMA(y)×(1−s)
where:
t=today
y=yesterday
N=number of days in EMA
s=2÷(N+1)
Though they are believed to be more accurate, however, it depends more on the trading strategy of the user.
The Golden Cross is an easy-to-use indicator. Once you understand its working, you would just have to keep a watch on the two moving average lines and you can easily place your trade accordingly.
The moving averages are available almost on all trading and charting platforms. Further, charting platforms like Tradingview present you with a Moving Average crossover which takes care of both the moving averages and also allows you to customize them for time periods, colors and labels.
The indicator and its strategy work well for both trading and investing, Traders use short-term moving averages like 15-min SMA20 with SMA50 and investors use long-term moving averages like DMA50 with DMA200.
There are a few conditions where the Golden Cross works. If these conditions change, they might make the strategy less accurate.
Golden Cross may fail if any fundamental and unexpected development takes place. This might be some announcement, regulatory action or geo-economic event.
For example, even if the Golden Cross is completed, an announcement regarding interest rates might crash the prices.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.