The golden cross is one of the most popular bullish signals among cryptocurrency traders, but it doesn’t necessarily mean you should enter the market immediately.
The Golden Cross pattern on the chart excites cryptocurrency traders as it promises future profit opportunities, largely due to its impressive success rate in traditional markets.
In contrast to the bearish death cross pattern, the golden cross often precedes a sustained uptrend. For example, since 1970, the S&P 500 has risen an average of about 15% in less than a year after a golden cross.
Benchmark crypto asset Bitcoin records golden cross
Bitcoin
Equally impressive, it is worth noting that this indicator has appeared on Bitcoin’s daily chart seven times since 2010, five of which led to massive bull runs.What is the Golden Cross pattern?
Before discussing the golden cross, let’s first discuss its core component, the moving average (MA).
Moving averages record the average change in an asset's price over a specific period of time. Mathematically, they are measured after adding a group of prices (recorded over a fixed time frame, such as hourly, four-hour, daily, weekly, monthly, etc.) and dividing the sum by the number of prices in that group.
Traditionally, golden cross observers focus on two specific moving averages: the 50-day moving average, which is the short-term moving average, and the 200-day moving average, which is the long-term moving average.
A golden cross pattern forms when a short-term moving average crosses above a long-term moving average. In other words, the pattern indicates that buying interest in a particular market has increased over the past 50 days compared to the previous 200 days.
How does the Golden Cross work?
A golden cross usually precedes a significant price increase in both traditional and cryptocurrency markets, which is why traders consider it a buy signal.
However, there have been cases where a golden cross was followed by a false breakout. Therefore, the golden cross pattern should be considered along with other technical indicators before making a decision.
First, traders can use the Relative Strength Index (RSI), a momentum oscillator that determines overbought and oversold conditions of an asset, to predict potential price pullbacks.
This strategy may have helped many traders avoid even bigger losses in February 2020. Let’s see why.
On February 1, 2020, Bitcoin’s 50-day moving average and 200-day moving average formed a golden cross around $9,500. Moderate excitement ensued, and the price rose to $10,500 in the next two weeks. During this period, Bitcoin’s daily RSI also rose above the overbought threshold of 70.
Bitcoin’s overbought conditions led it to fall towards its 50-day and 200-day moving averages ($8,500 to $9,200 range). However, its price eventually fell below $4,000 into March, coinciding with the global market crash caused by the onset of the COVID-19 pandemic.
The case study explains that golden crosses are not 100% accurate in predicting future trends. Instead, they can only help traders and analysts by utilizing momentum indicators and fundamentals to predict short-term and long-term price action.
These momentum indicators may include Moving Average Convergence Divergence (MACD), Stochastic RSI, Rate of Change (ROC), Average Directional Index (ADI), etc.
In other words, traders are advised not to buy into the golden cross pattern too early. Instead, they can wait for the price to consolidate sideways or lower and find short-term support before deciding to enter a trade.
In volatile market conditions, the definition of a golden cross can also be altered by changing the moving averages.
For example, the short-term MA uses a 20-period MA and the long-term MA uses a 50-period MA. The 20-50 day MA combination has historically helped traders identify short-term crypto market trends, as shown in the March 2020 to November 2021 bull run in the chart below.
Golden Cross Does Not Mean Guaranteed Returns
While golden crosses do often precede significant price increases in Bitcoin and the cryptocurrency market, the risk of bulls getting trapped remains.
Ultimately, traders should be cautious with crossover signals as blindly following them can result in losses. As mentioned above, false signals can occur, so it is important to confirm any golden crossovers using other technical indicators before taking any trades.