What is a Golden Cross in trading?
A Golden Cross is an indicator within the technical analysis of trading that investors use to predict a potentially bullish reversal in a market. It occurs when the short-term moving average of an asset’s price rises above its long-term moving average, which has just occurred in the gold market.
It is essential to understand, identify and predict price movements to make the best investment decisions in stock markets. For this purpose, there are two contrasting analytical techniques, but they can be used complementary when deciding whether to buy or sell certain assets.
On the one hand, we have fundamental analysis, which attempts to calculate the real value of an asset by studying the primary variables of a company, such as the balance sheet of sales and profits or cash flow, which affect its current and future value, to find out whether it is a good or bad investment.
On the other hand, a technical analysis predicts when to buy or sell securities based on statistical indicators displayed on graphs, assuming that a thorough study of them will help us to forecast their future value. Specifically, it studies market movements, observing the price of the asset and stock market volume, using futures markets and stocks to determine upward or downward trends that complement fundamental analysis.
Moving averages, trend lines and crossovers
In charts used in technical analysis, a moving average is a technical indicator that combines prices of an asset over a set period and divides them by the number of data points collected to give a trend line. This trend line connects a variety of data points that reflect the highs or lows of prices over a given period.
Moving averages are intended to smooth out price fluctuations, thus helping us to see the trend of the security or index over time, beyond one-off or insignificant fluctuations. A moving average of prices can be calculated over the short (10 days), medium (50 or 100 days) or long term (150 or 200 days), and can be simple (all data are treated equally when calculating the average) or weighted (greater weight is given to more recent data).
A crossover occurs when the actual price line of an asset or index crosses the prediction line made by the moving average. In this case, it is considered that there is a change of trend, either bearish when it crosses it downwards or bullish when it crosses it upwards.
Golden Cross indicates an uptrend
When a short-term moving average crosses above a long-term moving average, it is called a Golden Cross, and is considered a clear indicator that the trend of the index is upward, therefore prices will continue to rise. It is in contrast to a Death Cross, a crossover below which indicates a long-term bear market.
Golden crosses have three key stages: first, there is a downtrend in the price of a stock that eventually bottoms out, followed by a crossing of the stock’s shorter moving average over its longer moving average, which triggers a change in trend. Finally, the stock continues its ascent towards higher prices.
This is what has taken place recently in the gold market. Although it has experienced a slight, one-off drop in value after making new all-time highs, the golden metal has formed a Golden Cross chart pattern, a sign that, some analysts say, more gains are coming and a prolonged upward cycle is beginning.
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