A Golden Cross occurs is a technical analysis indicator seen when the 50-day moving average eclipses the 200-day moving average of a particular asset. Its opposite is the Death Cross which occurs when the 50-day moving average crosses below the 200 days moving average.
A Golden Cross is often seen as a bullish signal, mainly in the stock shares of the top 500 companies in the world(S&P 500). It is a bullish signal since the market tends to rise for the next 6 to 12 months.
However, it is not always safe to enter the market because of the Golden Cross since it takes time to predict bullish markets. This is one major limitation since it analyzes the current market against many past days. Therefore, it is not good to leap into the market just because of the Golden Cross signal.
The Stages of a Golden Cross
There are three stages of the Golden Cross. The first stage begins with a downtrend below the slow-moving average. The prices then stop going down and start approaching the slow-moving average, which triggers the second stage of the Cross.
In this stage, the prices cross the slow-moving average, and that’s where the Golden Cross starts to appear. Then the fast-moving average follows the price crossing the slow-moving average, which now confirms the Golden Cross.
The final stage occurs when everything begins to move above the moving averages to the upside.
How to Use the Golden Cross Analysis
When the Golden Cross happens, people tend to go wrong about the market. One of the commonly made mistakes is trading when the market is ranging sideways. Trading on a sideways trend is a costly mistake since sideways markets jump to both sides of the moving averages; therefore, they bear significant risks.
The next mistake is investing after a big vertical move in the Golden Cross. While it is advisable to trade the death cross at big vertical movements, it’s suicidal to trade the Golden Cross on such moves. Instead, it is advisable to enter the market after significant price falls (Pullbacks).
It is good to invest in the bearish markets and after a pullback because that’s when another moving average starts. Also, consider waiting for the steady downtrend markets to calm down before investing your money.