On a previous article, the fundamentals of moving averages are discussed. To recap, moving average is one of the most popular methods used by traders in determining the trend of a certain asset or stock. This is also a great toll to gauge the strength and potential of the momentum of an asset and to predict the possible support and resistance.
Since that is already tackled, let us study about one of the most important patterns related to moving averages—the golden cross or GS. Firstly, let us define what a golden cross in trading is. According to investopedia, the GS is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average breaking above its long-term moving average or resistance level, like when a 50-day MA broke above a 100-day MA. As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon and is reinforced by high trading volumes.
In depth discussion of this would be in another article, as this one would talk about the effective uses of a GS. Plenty of traders know about the GS, but most didn’t know how to use it. What they also didn’t know is that the GS can be one of the best indicators of a turn in foreign exchange market trends.
First and foremost, it is important to remember that the bigger the difference between the two SMAs, the more powerful the golden cross signal is. A perfect example of this is the classic setup when a 50-period SMA crosses above a 200-period SMA.
Above example is EUR/GBP daily chart. The pair experienced a GS on January 12, 2016 and the trade went upward from there. This shows that the GS pattern has a pretty straightforward price expectation and that is higher.
Another Golden Cross Strategy
Above is an example using simple moving averages. Another strategy is the EMA golden cross trading. The exponential moving average (EMA) is different from the SMA because it places more emphasis on the most recent periods on the chart. To get the EMA golden cross, let us stick to the classic 50-day and 200-day rule.
This is the same EUR/GBP daily chart used above but the MA on this one is exponential. As we can see, the pair retained its golden cross on January of this year (in green box) and went upward from there. However, there is also another cross before it, and it was called the death cross (in red box). This is when the 50-day EMA crossed below the 200-day EMA. This indicates a bearish trend.
This happening is the perfect example why a trader cannot always be on the market, as the trend changes from up to down and one needs to know when to get off the market and when to jump into it.
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