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The Golden Cross: What is it and How to Identify it when Trading?(Feb 26, 2021)
What is a Golden Cross?
A golden cross occurs when the 50 simple moving average (SMA) crosses above the 200 SMA. The golden cross provides a bullish backdrop to the market as short-term price momentum advances higher, with the potential to evolve into a new long-term trend (uptrend).
The 50 SMA is an arithmetic average of closing price levels over the last 50 periods or days, if you are using the daily chart for example. Therefore, the 50 SMA is more reactive to more recent price movement than the 200 SMA, which averages out the last 200 closing prices and tends to create a smoother line, less reactive to recent prices than the 50 SMA.
How to Identify a Golden Cross
There are three main stages to the formation of the golden cross:
1. The lead up: Price action consolidates or, in some scenarios, turns sharply higher after trending lower for a considerable period of time. This provides the initial clue that the downtrend may be starting to lose momentum and could even result in an eventual trend reversal. The 50 SMA remains below the 200 SMA during this stage.
2. The golden cross: This is the exact moment the 50 SMA crosses above the 200 SMA, providing the bullish backdrop for the market known as the golden cross. The golden cross is often interpreted as a trigger to look for entries into the market.
3. Continued upward momentum: Price action advances higher after the golden cross is observed, often creating a fresh new trend (uptrend). Ideally, in this stage you may observe the shorter 50 SMA acting as dynamic support for price action and price continues to trade above the 50 SMA for some time.
