By Arjun Chandrasekar.
Overview
When analyzing stock charts, one familiar pattern you might come across is called the Gold Cross Pattern. This occurs in an upward-trending graph, when the short-term moving average crosses the long-term moving average. You probably don’t know what these terms mean or indicate, so let’s briefly cover that.
First, let’s start off with the simple moving average (SMA), which is the average price of a stock divided by the number of time periods it follows. The SMA calculates the average prices of a stock over a certain period of time, and can tell us if a stock will continue to be bullish or reverse into bearish tendencies. The SMA contains 2 main moving averages, short-term and long-term. Short-term moving averages tend to fluctuate more in price, while long-term moving averages react more slowly. Short-term moving averages generally increase faster than the long-term moving averages, until they cross, thus forming the Golden Cross Pattern.
Indications and Reliability
The Golden Cross Pattern essentially “predicts” a bullish trend after the stock’s short-term and long-term averages cross. When analyzing moving averages, analysts and traders generally use common periods including 50-day, 100-day, and 200-day. With all technical analysis comes the factor of reliability. Especially during short timings, in the realm of seconds, lag plays a huge role in these indications. Most of the time, the cross pattern does signify correct predictions, but if your technical analysis tool does have lag issues, the prediction could be affected, thereby causing a loss of money and potential returns. For example, if an investor decides to play a long-term hold based on a lagged pattern they saw, and they are not able to get out of the hold until day-end, they could potentially lose a large amount of money. If you are intending on experimenting with learning and implementing the golden cross pattern, this is an important drawback to note. Our suggestion is to use the pattern to confirm a previous analysis, rather than using it as a primary analysis to base a decision off of — using other types of indicators is a huge plus in this situation.
Example
One recent example of a popular golden cross pattern was on August 6th, 2020. When analysts compared the 50-day and 200-day moving averages of the ever-so popular Dow Jones, they noticed that they were at 26,251.34 and 26,229.91, respectively. After the cross, the display indicated a bullish trend, backing up the pattern strategy, and allowing investors to be more confident in their bullish investments. This is just one instance of many correct predictions that golden cross patterns make.
Conclusion
Overall, the golden cross pattern is generally a reliable strategy to predict a bullish trend for a stock. When using this strategy, it is important to note that it only works when using the 50-day and 200-day moving averages in unison. Also remember that lag plays an important role in the indications, so you can’t always expect the prediction to be correct. However, we recommend you look out for the opportunity to try the golden cross pattern; if the prediction results in a profit, let us know in the comments below!
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