Chart patterns are an essential part of technical analysis and are widely used for predicting future currency prices. Patterns help traders spot reversals and trend continuations from an early stage. Which gives traders good risk to reward ratios and helps them maximize their profits. Golden Cross chart pattern is well-known among professional traders, but what is Golden Cross exactly and how to use it?
Golden Cross definition
Golden Cross is a bullish pattern that indicates a potential for beginning a new bullish trend. Golden Cross forms when a short-time moving average crosses a relatively long-time moving average.
Why is the Golden Cross important for traders?
- Traders can use Golden Cross to prepare for upcoming bullish runs and make profits.
- Beginner traders can easily spot this pattern on the chart and trade.
- It is recommended to always use Golden Cross with other bullish indicators for better accuracy.
- The Golden Cross chart pattern is very similar but opposite to the Death Cross pattern. By learning how to use the Golden Cross, learning how to use the Death Cross becomes easier.
- The Golden Cross pattern offers a great risk to reward ratio. As risks are limited and reward potential depends on the strength of a new trend.
- Understanding Golden Cross in trading helps manage active trades better. For instance, if a trader is shorting an asset and spots the bullish pattern forming, he or she might cancel the trade to avoid trading against the pattern.
Thorough Golden Cross explanation
Golden Cross is a bullish chart pattern that signals an upcoming trend uptrend. During its formation, a short-time moving average breaks out and crosses over the relatively long-time moving average. It is not specified the duration of these moving averages, but the most common ones used are 50- day and 200-day moving averages.
Moving average consists of three stages. The first stage is when the ongoing downtrend slows down and eventually bottoms out. During the second stage, the short-time moving average starts to rise and crosses over the long-time moving average, signalling the trend reversal. And the last stage is a continuation of the uptrend. This is a thorough yet simple Golden Cross explanation.
Trading using moving average indicators is based on the belief that prices deviate from the mean and are likely to return to the mean price later. Technical indicators are great at incorporating past performance in their predictions, but completely fail to take into account new developments. And therefore, it’s best to use additional factors such as fundamentals and trend indicators in accordance with the Golden Cross pattern.
Example of Golden Cross in Forex
Now let’s look at the Golden Cross example in Forex trading. Below you can see the chart of the USD/JPY currency pair. Notice that the 200-day moving average has been in the range of 108.587 and 110.545. The 50 day moving average trends up faster than the 200 day moving average, crosses it and gives traders an entry signal. The moment the two indicators cross each other is called a Golden Cross and traders can enter Long.
FAQs on Golden Cross in trading
Is the Golden Cross a good indicator?
Golden Cross is a chart pattern and not an indicator. Golden Cross uses two moving averages. The pattern is great for spotting potential bull runs and therefore is highly useful for traders. On the downside, patterns fail to take into account market news and therefore, it’s always best to use them in combination with economic news and other indicators.
What timeframe is best for Golden Cross?
Traders can change the moving average time frame based on their own preferences. However, trading platforms are using 200-day and 50-day moving averages as a standard.