Not sure if the bulls are back? Here’s how the golden cross spots trend reversals

The most necessary facet in buying and selling is to accurately establish the long-term trend. Once that is achieved, the remainder of the steps are not very tough as a result of all a dealer must do is search for shopping for alternatives in an uptrend and promoting alternatives in a downtrend. 

In actuality, many merchants complicate the course of by ready for decrease ranges to purchase in a bull market and lacking a big portion of the rally. Then, when the trend reverses and the worth begins falling, the identical merchants begin shopping for, which often ends in losses.

To keep away from this pitfall, merchants can incorporate the use of key transferring common convergence patterns to be able to have a greater gauge of market momentum and the path of the trend. In final week’s article, we reviewed the Death Cross, and this week we are going to take a look at the golden cross sample. This setup might help maintain merchants at bay in a downtrend and provides them a inexperienced sign to start out shopping for when the trend turns bullish.

Let’s examine this sample and be taught how to make use of it when buying and selling.

What is a golden cross and how does it type?

A golden cross is a setup that alerts a doable change in a bearish downtrend. It is shaped when a quicker interval transferring common, often the 50-day easy transferring common, crosses above the longer-term transferring common, typically the 200-day SMA.

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BTC/USD each day chart. Source: TradingView

In a downtrend, each the 50-day SMA and the 200-day SMA are sloping down. However, when the worth reaches a beautiful valuation, long-term traders begin accumulating, which arrests the tempo of the decline. As extra traders begin shopping for, the trend begins to show up.

A sustained up-move ends in the 50-day SMA altering its path from right down to up. However, the 200-day SMA is slower to reply, therefore when it’s both falling or has flattened out, the 50-day SMA rises above it, forming the golden cross.

When a golden cross varieties, it’s a signal that the downtrend has ended and a brand new uptrend may have begun.

However, like each setup, the golden cross shouldn’t be foolproof. It offers false alerts a number of occasions however with a number of filters, merchants could scale back the whipsaws.

Related: Here’s 5 ways investors can use the MACD indicator to make better trades

A worthwhile golden cross

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BTC/USD each day chart. Source: TradingView

Bitcoin (BTC) bottomed out at $3,858 on March 13, 2020, and the most up-to-date golden cross shaped on May 21, 2020, when the worth closed at $9,061.96. That means, the BTC/USD pair had already moved 134% from the lows by the time the golden cross confirmed a change in trend.

Inexperienced merchants could have felt the worth has run up too quick and would have waited for a deep correction to occur earlier than shopping for. However, when a trend adjustments, it hardly ever offers a possibility to purchase at a lot decrease ranges as was the case right here.

The rally by no means appeared again and it hit an all-time excessive at $64,899 on April 14, 2021, a large 616% achieve from the stage the place the golden cross shaped. This exhibits that the dealer who simply purchased and held after the formation of the golden cross would have earned enormous returns.

However, each golden cross doesn’t present such outsized returns and typically merchants fall sufferer to whipsaws.

A failed golden cross

Bitcoin dropped from a neighborhood excessive at $13,868.44 on June 26, 2019, to a neighborhood low at $6,430 on Dec. 18, 2019. The golden cross shaped on Feb. 18, 2020, when the pair closed at $10,188.04.

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BTC/USD each day chart. Source: TradingView

However, merchants who purchased after the golden cross shaped could have suffered fast losses as the pair plummeted to $3,858 just some days later. This exhibits how merchants could typically get caught on the flawed foot by simply shopping for after the golden cross.

Related: Unsure about buying the dip? This key trading indicator makes it easier

Filters can when the golden cross throws a false sign

Traders may keep away from shopping for if the golden cross varieties when the 200-day SMA remains to be sloping down. They can look ahead to the 200-day SMA to flatten out or flip up earlier than shopping for as which will scale back the whipsaws.

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EOS/USDT each day chart. Source: TradingView

As an instance, EOS shaped a golden cross sample on Feb. 8, 2020 when the worth was at $4.76. This worth cleared the filter as the 200-day SMA had flattened out. However, had merchants taken the commerce, it could have became a loss as the EOS/USDT pair topped out at $5.49 on Feb. 17, 2020, after which plunged sharply to $1.35 on March 13, 2020.

The second golden cross on Aug. 22, 2020, didn’t clear the filter as the 200-day SMA was sloping down when the sample shaped. This would have stored the bulls from getting sucked into this commerce.

The third golden cross on Dec. 12, 2020, cleared the filter however it could have hit the stop-loss because it breached the sturdy help at $2.20 on Dec. 23, 2020. Finally, the fourth golden cross that shaped on Feb. 08, 2021, turned out to be worthwhile.

The above instance exhibits that when the worth is caught in a variety, the golden cross doesn’t act as the preferrred indicator. Therefore, merchants could add one other filter to purchase solely after the worth breaks out of the vary. This could scale back the whipsaws additional and assist merchants purchase solely in uptrends.

When a cryptocurrency is in a downtrend, merchants could look ahead to the golden cross to happen earlier than beginning their purchases. This may maintain merchants out of hassle in a falling market.

After the golden cross sustains and a brand new uptrend is confirmed, merchants could search for shopping for alternatives. Among the many potentialities, one which was highlighted in an earlier article to purchase on dips to the 20-day EMA or the 50-day SMA may come in useful.

Key takeaways

A golden cross can verify {that a} downtrend has ended and a brand new uptrend may have begun. Until a golden cross varieties, long-term traders could keep away from cherry-picking as which will lead to losses in a downtrend.

However, like each different sample, the golden cross shouldn’t be excellent. It could lead to whipsaws if the coin enters a consolidation throughout the bottoming formation. Therefore, merchants should take precautions to keep away from being sucked into bull traps.

Once the uptrend is established after the golden cross, merchants could search for shopping for alternatives and stick with the trend until a reversal is signaled.

The views and opinions expressed right here are solely these of the creator and don’t essentially mirror the views of Every funding and buying and selling transfer includes threat, you need to conduct your individual analysis when making a call.