How to Use Golden Cross to Advance Your Crypto Trading

The Golden Cross is a trading momentum indicator in cryptocurrency markets where a short-term moving average, like the 50-day average, crosses above a long-term moving average, such as the 200-day average. This pattern is often seen as a bullish signal, indicating potential upward momentum in the price of a cryptocurrency.

In the crypto market, where market trends can change rapidly, spotting an opportune time to enter the market is challenging. Luckily, a crypto trader still has a versatile toolkit of indicators to find the right time to buy crypto or increase their holdings before bullish trends form and hold. One of these indicators is the Golden Cross - a valuable momentum indicator to help traders enter the market before a bullish trend consolidates.

In this article, we will dive into the intricacies of Golden Cross and how you can use it to your advantage with the combination of other technical analysis tools.

The Golden Cross is a widely used technical signal in stocks and commodities trading, signaling a pivotal shift from a bear market to a bull market. This shift is identified by the crossing of short-term (usually 50-day SMA) and long-term moving averages (usually 200-day SMA), followed by a subsequent confirmation of the trend reversal. It suggests a potential upward trend in the market, indicating a buying opportunity for traders.

In the highly volatile crypto market, the formation of Golden Cross could indicate the start of a bullish market trend and signal the users to buy the crypto before more buying pressure consolidates. Spotting a Golden Cross involves looking for the crossover of moving averages on trading charts, both for the short-term and the long-term. The most important ones are the 50-day and 200-day moving averages.

The 50-Day Moving Average: This is a key short-term moving average that traders monitor for identifying near-term market trends. It represents the average closing prices of an asset over the last 50 days. When this average moves above the longer-term 200-day moving average, it is often considered a bullish sign. This suggests that short-term market sentiment is more positive and could increase buying activity.

The 200-Day Moving Average: Conversely, the 200-day moving average is a crucial long-term trend indicator. It reflects the average closing prices over the past 200 days and is used to gauge the overall health of the market over a longer period. A rising 200-day moving average indicates a long-term uptrend, while a falling 200-day moving average suggests a long-term downtrend. When the 50-day moving average crosses above this line, it reinforces the signal that the long-term market trend might be reversing from bearish to bullish.

Source: Coindesk

The recent approval of 11 Spot Bitcoin ETFs by the SEC on January 10, 2024, and the upcoming Bitcoin halving event pushed the Bitcoin price to surpass its Golden Cross recently on its weekly chart. In March 2023, Bitcoin’s 50-week average slipped below the 200-week average but since then gained momentum with the high expectation of spot Bitcoin ETF approval before the final decision date.

Initially, the market was relatively stable, with Bitcoin's price fluctuating between $30,000 and $35,000. Over the course of 50 weeks, the average closing price of Bitcoin gradually increases, which is reflected in the rising 50-week SMA. Concurrently, the 200-week SMA, which reflects a longer-term price trend, remains relatively flat or increases at a slower rate.

The formation of the Golden Cross signals a potential shift in market sentiment from bearish (or neutral) to bullish for Bitcoin. Traders and investors who recognize this pattern might view it as a favorable time to buy Bitcoin, anticipating a long-term upward trend in its price. However, it's essential to consider this indicator as part of a more comprehensive market analysis, as it's based on historical data and doesn't guarantee future price movements.

Contrary to the Golden Cross, Death Cross is a bearish signal where the shorter-term moving average falls below the longer-term moving average, suggesting a downward trend and increasing pessimism.

The Golden Cross typically forms during the early or middle stages of an uptrend when the market is recovering from a downturn. On the other hand, the Death Cross often forms during the early or middle stages of a downtrend, following a period of bullish market activity.

During the FTX collapse, a Death Cross was formed on Bitcoin’s weekly chart, indicating deep selling pressure for the trapping sellers in December 2022.

Source: Coindesk

When using the Golden Cross for crypto trading, it's crucial to consider the following expanded factors:

Market Context: Evaluate the broader market conditions. The Golden Cross doesn't operate in isolation; external factors like global economic conditions, regulatory news, or significant events in the crypto industry can impact its reliability.
Volume Confirmation: When assessing a Golden Cross signal in trading, it's essential to verify it with trading volume changes. A significant increase in volume indicates a stronger market consensus, lending credibility to the Golden Cross. Additionally, monitor the inflow and outflow of the cryptocurrency in question. Inflows to exchanges might signal potential selling pressure, while outflows typically suggest accumulation. These patterns help determine the market's support for the bullish trend implied by the Golden Cross, ensuring a more informed and reliable trading decision.
Combine the Golden Cross with Additional Indicators: Don't rely solely on the Golden Cross. Incorporate other technical indicators like RSI, MACD, or Bollinger Bands for a more rounded analysis.
Beware of False Signals: The Golden Cross can occasionally give false signals. Always be prepared for scenarios where the expected bullish trend does not materialize.
Risk Management: Implement strong risk management strategies. Use stop-loss orders and only invest what you can afford to lose.
Lagging Nature of the Indicator: Remember that the Golden Cross is a lagging indicator, meaning it is based on historical data. While the historical performance of Golden Crosses can be studied, it's important to remember that past performance does not necessarily predict future market trends. Market dynamics can change, and what worked in the past may not work in the future.

In conclusion, the Golden Cross in crypto trading is a technical analysis signal where the short-term moving average (like the 50-day SMA) crosses above the long-term moving average (like the 200-day SMA), suggesting a potential shift to a bullish market trend. While it's a valuable tool, its effectiveness depends on combining it with market context analysis, volume confirmation, and other technical indicators.

Traders should be aware of its lagging nature and that past performance does not guarantee future trends. Traders should do more research and adapt their strategy to the cryptocurrency market's dynamic and often unpredictable nature.