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The Golden Cross Pattern Explained with Examples

26 Nov 2023

Introduction:

In the dynamic world of the stock market, investors and traders often rely on various technical indicators and chart patterns to make informed trading decisions. These patterns are derived using historical data and mathematical formulas and help you speculate short-term price movements in a stock.

One of the crucial technical indicators that holds significance among stock market investors is the “Golden Cross”. It may sound like jargon to those new to stock market trading, but it is a powerful tool that can provide valuable insights into market trends. keep reading this article to delve deep into the concept of the Golden Cross in stocks and realise its importance for traders.

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What is a Golden Cross?

A Golden Cross is a technical analysis pattern that occurs when the short-term moving average of a stock moves above the long-term moving average. Typically, the short-term moving average refers to a stock's 50-day moving average, and the long-term moving average refers to the 200-day moving average.

The appearance of the Golden Cross in a technical chart is considered a bullish signal, indicating a potential reversal of the market trend from bearish to bullish or a continuation of the ongoing bullish trend. The term Golden Cross represents a golden opportunity for investors to enter long positions and capitalise on the upward price movements.

Understanding Moving Averages

Before moving further into the details of the Golden Cross, you need to under what moving averages are. A moving average is the statistical average price of a stock for a specific period. It is calculated by adding up the closing price points of stock for x days and then dividing the sum by x to arrive at an average price.

For example, you can calculate the 50-day moving average of a stock by adding its closing prices for 50 days and then dividing the sum by 50. It represents the average closing price of a stock for the last 50 days. Similarly, you can calculate the 200-day moving average by adding the closing prices for 200 days and then dividing the sum by 200. It represents the average closing price of a stock for the last 200 days.

The Three Stages of a Golden Cross

The formation of a Golden Cross involves three distinct phases. The first phase comprises a downtrend on its concluding legs, with sellers losing control over stock and buyers trying to come into the picture.

The second phase comprises the emergence of a fresh uptrend. It occurs when buyers take control of the stock. The breakout of an uptrend is confirmed when the short-term moving average of a stock crosses above the long-term moving average, forming a Golden Cross on a technical chart.

In the third phase, the newfound uptrend persists, confirming a strong bullish phase. It happens when buyers have taken full control of a stock. Throughout this phase, both the moving averages of a Golden Cross serve as support levels during corrective downside retracements. This phase can be confirmed with the price points of a stock staying above the moving averages.

Using the Golden Cross for trading

As a stock market trader, you can utilise the Golden Cross to determine entry and exit points for your trades. Below are a few trading strategies you can consider:

  • Bullish trend confirmation

The primary significance of a Golden Cross is the confirmation of a bullish trend. Traders often interpret this pattern as indicating that a stock will likely experience upward momentum.

  • A strong buying signal

The Golden Cross serve as a strong “Buying” signal for traders, indicating that it might be an opportune time to enter a long position. It is beneficial for intraday or swing traders capitalising on upward price movements.

  • Trend reversal

In addition to confirming a bullish trend, the formation of a Golden Cross also signifies trend reversal. It suggests shifting from the previous bearish trend to a new bullish one.

  • Volume confirmation

Traders often confirm the indications of a Golden Cross with increased trading volume during the crossover. Higher volume indicates greater market participation, further justifying the possibility of a strong bullish trend.

To conclude

Golden Cross is a widely used technical analysis tool for determining entry and exit points for stock market trading. However, like any other technical indicator, it could be more foolproof. Hence, you must use it with other technical indicators and chart patterns.

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 

 

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