Have you ever heard of golden cross trading strategies for the cryptocurrency market? If not, there’s good news for you — because in the following section, we will see the top five golden cross trading strategies that may make your trading life more fruitful.
In golden cross strategies, a lower-valued moving average crosses over a higher valued moving average, indicating a strong momentum in the trend. Nevertheless, the challenging factor is to find where to enter the market based on golden cross strategies.
After completing the Golden Cross trading guide, you will have a deep understanding of the Golden Cross strategies that you can apply to any crypto asset.
What is a Golden Cross?
A golden cross happens when a short-term moving average crosses over a long-term moving average (MA) toward the upside. It is a solid, bullish price direction that works well with most crypto trading assets.
The original golden cross trading strategy has its origins in the stock market. The main components of the golden cross pattern include two moving averages:
- 200-day moving average
- 50-day moving average
The 200-day MA is regarded as being one of the most popular, while the 50-day MA is a leading moving average.
The Anatomy of a Golden Cross
In the regard to the golden ross, the short-term moving average moves above the long-term moving average, pointing to bullish momentum in the price.
Conversely, the death cross happens when the short-term moving average crosses below the long-term moving average. It is simply the opposite of the golden cross.
Let’s start with the basics.
Moving average represents the overall market sentiment of the trading asset. When the price is trading above the moving average, the buyers are stronger than the sellers.
So, what does it mean if the price is trading above the 50 days MA?
It means bulls have been controlling the market for the last 50 days. So, in this market condition, traders who focus on buy trades have a higher chance of making a profit.
We’ve learned that the price above the moving average is a sign of bullish pressure. However, what if a short-term moving average crosses above the long term moving average?
In that case,it is a clear indication that both short-term and long-term traders are bullish, and after the crossover, short-term traders become more bullish than long-term traders.
So, the golden cross indicates that the short-term traders are more substantial where long-term traders are also bullish. In this situation, what do you expect from a buy trade?
A sharp movement toward the upside!
There are three stages of a golden cross:
- In the first stage, a downtrend ends as selling is depleted.
- Later on, the short-term moving average crosses over the long term moving average.
- Finally, the price continues upside, pointing to an impulsive, bullish pressure.
How to Use a Golden Cross
Trading is more practical than having only theoretical knowledge. If you want to get the maximum output from the golden cross, you need to make sure that you are using it perfectly.
But, how to use the golden cross?
At first, you have to ensure that the crossover happens and a candle closes above the crossover. Later on, you’ll want to focus on building a trading strategy with an appropriate stop loss and take profit levels.
There are many trading strategies based on the golden cross, and you can make a decent profit from any of these.
50 EMA Crosses Over the 200 SMA
In the golden cross, the more effective moving average values are the 50 EMA and 200 SMA. Before proceeding to the trading strategy, let’s look at the key difference between SMA and EMA:
The Simple Moving Average (SMA) focuses on the average price of the last number of candles, using the average value. On the other hand, the Exponential Moving Average (EMA) focuses on the most recent prices. Therefore, both EMA with a short-term value and SMA with a long-term value provide the most reliable price direction.
Identifying the 50 EMA and 200 SMA crossovers is very simple. We can see the Bitcoin hourly chart in the image below, where the 200 SMA is represented by the orange color and 50 EMA by the light blue color.
Here, we can see how the price moves up with a strong bullish pressure as soon as the 50 EMA moves above the 200 SMA.
Here is a step-by-step guide to trading the 50 & 200 EMA golden cross:
- Wait for the price to aim higher by creating a higher high to define the overall price context as bullish.
- Identify the 50 EMA below the 200 SMA and wait for a crossover.
- Wait for the crossover candle to close above the two moving averages, and enter the buy trade on the next candle.
- The stop loss should be below the 50 EMA. The logic behind the stop loss is to consider the trade valid as long as short-term traders are holding the price above the 50 EMA.
- The primary stop loss would be based on 1:1 risk/reward where you should take some profit and move the stop loss at break even.
- Later on, the final take profit level would be based on 1:2 risk/reward ratio or near-term resistance level.
A Golden Cross with Double Bottom Pattern
Taking trades based solely on the crossover might not be suitable every time. So what if a golden cross happens, but the price moves downward?
You might think this is a false crossover signal, but that’s not the case.
If you don’t want to miss those trades, the golden cross with a double bottom pattern strategy is for you.
What is the double bottom?
Double bottom is an area where the price makes two equal lows. It indicates that sellers tried to take the price down, but bulls became active at this level to take the price higher.
Here is an example of a double bottom pattern.
Here is how to take trades based on golden cross with Double Bottom Pattern:
- Wait for a golden cross to happen with an impulsive, bullish pressure.
- The price should come down below the 50 EMA but above the 200 SMA, with a corrective speed.
- Identify the double bottom pattern and wait for a candle to close with a new high to confirm the pattern.
- Enter the trade as soon as a new bullish candle appears with a higher high.
- The stop loss should be below the low of the double bottom pattern with some buffer.
- The first take profit will be based on a 1:1 risk/reward ratio, where you should close 50% of the trade and move the stop loss at break even.
- Lastly, you can hold the trade as long as possible, but taking total profit at the near-term resistance level would be the best idea.
The double bottom pattern is confirmed once a candle closes above the highest point of this price structure. This also triggers our entry.
The stop loss is below the recent low, plus a buffer for extra protection, and the full profit was taken with a 1:2 risk/reward ratio.
Golden Cross with 50 EMA Carry
We have seen how the price comes below the 50 EMA and forms the double bottom pattern. However, in strong trending markets, after the crossover, the price should not break below the 50 EMA.
In this case, we look for the price to find support at the 50-period EMA, which is going to stop the price from dropping further.
You can take trades from the 50 EMA carry.
When does the 50 EMA carry happen?
If the bullish pressure is strong, the price might move along with the 50 EMA instead of moving below it. It is often tricky to know whether the 50 EMA will hold the price, or not. Still, if at least two bearish rejection candles appear at the 50 EMA level, we may consider it a carry.
We can see that the Bitcoin golden cross happens in the above chart, and the price becomes corrective immediately afterward. Instead of moving down below the 50 EMA, it starts to stall at the 50 EMA area.
So, the 50 EMA carry happens when the price stays glued to the 50-period moving average.
How to take an entry?
Let’s discuss the entry and exit strategy:
- At first, wait for the golden cross pattern and identify a corrective market. Notice that there is a strong bullish movement following the EMA crossover, which points to a high probability trade.
- Wait for the price to stall at the 50 EMA. Two consecutive and successful retests of the 50 EMA can often be an indicator for a bullish reversal.
- After the 50 EMA carry, wait for a bullish candle to break above the most recent swing high.
- Enter the trade at the close of the bullish candle.
- The stop loss should be below the 50 EMA with some buffer, and the take profit should be based on trailing the stop loss below the 50 EMA.
The above image is a perfect example of the 50 EMA carry trade. The trade was triggered at the first bullish candle that broke above the most recent swing high.
Golden Cross Trading From the Event Level
When the golden cross happens in the market, we may expect the bullish pressure to extend as long as the price is trading above the SMA 200.
Therefore, if you find any event level after the golden cross pattern, consider it a good buying point.
Let’s explain what an event level is.
In technical analysis, we have the standard support and resistance levels at which the price has the tendency to stop and reverse. However, some levels work as both support and resistance. This is what we call event levels.
For example, when old support is broken and the price revisiting that area turns into a resistance level, that’s an event level. And vice versa: when old resistance becomes new support, we have an event level.
An event level requires bigger bullish/bearish pressure to be broken. Subsequently, it’s more reliable support and resistance level.
This is why the event level is the most important static level, or zone, that traders can watch for. Both buyers and sellers are active at this level, and any trade setups from this level provide high accuracy trades.
Here we can see how the event level formed, and how it worked as both support and resistance level.
Now, let’s move to the trading strategy:
- Wait for a golden cross in the price, and mark levels that worked as both support and resistance levels.
- Price should come lower toward the event level and show some bearish rejection.
- Wait for the bearish rejection candle, such as bullish pin bar, bullish engulfing bar before entering a trade.
- The stop loss should be below the chart pattern with some buffer, and the take profit should be when the price first reaches a level of resistance.
The BTCUSD chart above outlines a trade example based on the event level. In this example, the bullish entry provided a 1:3 risk/reward ratio.
Mean Reversion Trading Strategy
All four trading strategies from the above section were trend-following strategies. In the financial market, there are both buyers and sellers at every price level. So, even if the price were to move higher after the golden cross, there is a possibility of bearish movement.
There is a strong gravitational attraction between the price and the 50-periods exponential moving average. When the gap between the price and 50 EMA expands, they start to come closer.
As a general rule, the bigger the gap between the price and the 50 EMA, the bigger the profit potential is.
How can you benefit from it?
In this strategy, we need a sharp movement after the golden cross, and the entry point is further validated by the MACD indicator.
In technical analysis, the Moving Average Convergence Divergence (MACD) can be used in many different ways; but the MACD divergence signals are the most accurate ones. The MACD divergence happens when the price moves in one direction and the indicator’s line is moving in the other direction.
Here we can see how MACD divergence forms and initiates a bearish movement.
Let’s look at the process to take the sell trade based on the mean reversion strategy:
- Wait for the golden cross and identify the price above the 200 SMA and 50 EMA.
- The price should be further away from the 50 EMA.
- Find the potential regular divergence with MACD, and wait for a bearish candle to close.
- Enter the trade after the candle closes and set the stop loss above the swing high, with some buffer.
- The first take profit is 50 EMA, and the final take profit will be 200 SMA.
In the above chart example, we can see how the price moves lower after forming a divergence with the MACD. The gap between the price and the 50 EMA extends at the entry point. As a result, the price reverts back to its average.
Does a Golden Cross Strategy Apply to Crypto Trading?
A golden cross happens when a short-term moving average crosses over a long-term moving average toward the upside. It is a solid, bullish price direction that works well in all financial markets.
But is it applicable to the cryptocurrency market?
The cryptocurrency market is an emerging one, in which technical analysis works completely fine, just as with the traditional forex or stock market.
Along with other technical strategies, the golden cross is very profitable in the cryptocurrency market. So, all five trading strategies that we have discussed in the above sections are profitable in any crypto pair, and across all time frames.
Like other trading strategies, the golden cross has some drawbacks. The moving average is a lagging indicator that provides signals after the movement happens.
But don’t worry!
You can quickly reduce the risk by observing what is happening in a higher time frame. If your trade direction matches that of higher time frames, you can consider it as a high probability trade.
Finally, we are at the end of the five most powerful golden cross Trading Strategies. It’s time to summarize what we’ve learned today:
- A golden cross happens when a short-term moving average crosses over a long-term moving average toward the upside.
- In the golden cross, the most important moving average values are the 50 EMA and 200 SMA.
- We can increase the trading probability by using multiple trading conditions after the crossover happens.
- Finally, golden cross strategies are very profitable in the cryptocurrency market. You can increase the trading probability by matching it to the higher time frames direction.
Besides having a profitable trading strategy, you should focus on solid trade management skills. The cryptocurrency market is very uncertain, and there is a possibility of unexpected market movement at any time. Therefore, make sure you actively manage your trade every time to protect yourself from adverse price reactions.