The most important aspect of trading is the correct identification of long-term trends. Once completed, the remaining steps are not very difficult, because all traders need to do is to find buying opportunities in an uptrend and selling opportunities in a downtrend.
In fact, many traders waited for lower levels to buy in a bull market and missed most of the rally, thus complicating the process. Then, when the trend reverses and the price starts to fall, the same traders start buying, which usually results in losses.
To avoid this trap, traders can combine the key moving average convergence mode to better measure market momentum and trend direction.In last week’s article, weHave seen the death cross, This week we will look at the golden cross pattern. This setting can help traders stay in a downtrend and give them a green signal to start buying when the trend turns bullish.
Let us study this pattern and learn how to use it in trading.
What is the golden cross and how is it formed?
The golden cross is a signal that the bearish trend may change. It is formed when the faster periodic moving average (usually the 50-day simple moving average) crosses above the long-term moving average (usually the 200-day average).
In a downtrend, both the 50-day moving average and the 200-day moving average are sloping downward. However, when prices reached attractive valuations, long-term investors began to increase their holdings, thus preventing the pace of decline. As more and more investors began to buy, trends began to emerge.
The continued upward movement causes the direction of the 50-day SMA to change from downward to upward. However, the 200-day moving average reacted slowly, so when it fell or flattened out, the 50-day moving average rose above it, forming a golden cross.
When the golden cross is formed, it indicates that the downtrend has ended and a new uptrend may have begun.
However, like every setting, the golden cross is not foolproof. It will give false signals many times, but through some filters, traders may reduce the amount of washing.
A profitable golden cross
Bitcoin (Bitcoin) Bottomed out to USD 3,858 on March 13, 2020. The most recent golden cross was formed on May 21, 2020, when the price closed at USD 9,061.96. This means that when the golden cross confirms the trend change, the BTC/USD pair has moved 134% from the low.
Inexperienced traders may feel that prices are rising too fast and will wait for a deep adjustment to occur before buying. However, when the trend changes, there are few opportunities to buy at a much lower level like here.
The rebound has never looked back, and it hit a record high of US$64,899 on April 14, 2021, a significant increase of 616% from the level formed by the Golden Cross. This shows that traders who bought and held just after the formation of the golden cross will get rich returns.
However, not every golden cross can provide such a huge return, and sometimes traders will become victims of washing.
Failed golden cross
Bitcoin fell from a local high of $13,868.44 on June 26, 2019 to a local low of $6,430 on December 18, 2019. The golden cross was formed on February 18, 2020, when the currency pair closed at $10,188.04.
However, traders who bought after the formation of the golden cross may suffer rapid losses as the currency pair plummeted to $3,858 a few days later. This suggests that traders may sometimes be led astray by buying after the golden cross.
When the golden cross throws false signals, the filter can
If a golden cross is formed when the 200-day SMA is still sloping downward, traders can avoid buying. They can wait for 200 days for the SMA to flatten out or re-buy, as this may reduce the amount of washing.
for example, EOS A golden cross pattern was formed when the price was $4.76 on February 8, 2020. As the 200-day SMA flattened out, the price cleared the filter. However, if a trader makes a trade, it will become a loss because the EOS/USDT currency pair reached a peak of $5.49 on February 17, 2020, and then dropped sharply to $1.35 on March 13, 2020.
The second golden cross on August 22, 2020 did not clear the filter because the 200-day moving average was sloping downward when the pattern was formed. This will prevent the bulls from getting involved in this trade.
The third golden cross on December 12, 2020 cleared the filter, but it hit a stop loss when it broke the strong support of $2.20 on December 23, 2020. Finally, the fourth golden cross of 2021, formed on February 8th, turned out to be profitable.
The above example shows that when the price is stuck in a range, the golden cross is not an ideal indicator. Therefore, traders may add another filter to buy after the price breaks through the range. This may further reduce washing and help traders only buy in an uptrend.
When a cryptocurrency is in a downtrend, traders may wait for the golden cross to appear before starting to buy. This can save traders from trouble in a falling market.
After the golden cross continues and a new uptrend is confirmed, traders may look for buying opportunities.Among the many possibilities, one is Earlier Articles about buying the 20-day moving average or 50-day moving average on dips may come in handy.
The golden cross can confirm that the downtrend has ended and a new uptrend may have begun. Before the formation of the golden cross, long-term investors may avoid picking cherries, as this may lead to losses in a downtrend.
However, like all other patterns, the golden cross is not perfect. If the coin enters a consolidation during the formation of a bottom, it may cause a washout. Therefore, traders must take precautions to avoid falling into a bull trap.
Once an uptrend is established after the golden cross, traders may look for buying opportunities and maintain the trend until a reversal signal appears.
The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.