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Golden Cross in Stocks - Meaning and How Traders Use It

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When it comes to the stock market, sometimes you might hear the term "golden cross" mentioned. It refers to a stock indicator that is popular among active stock traders.

This article will explain what a golden cross is and how traders might be able to benefit from finding one.

 

What Exactly Is a Golden Cross?

A golden cross is a stock indicator that is based on a type of moving average crossover.

A moving average crossover is a technical analysis tool used in stock market trading. It involves plotting two different moving averages on a price chart.

A moving average crossover occurs when two moving average lines on a stock chart intersect.

In the case of a golden cross, the moving average crossover consists of two moving average lines: a 50-day moving average and a 200-day moving average.

This means that before the golden cross occurs, the 50-day moving average is below the 200-day moving average. After the golden cross, the 50-day moving average is above the 200-day moving average.

There are different types of moving averages, such as simple moving average lines and exponential moving average lines. A golden cross can occur with any type of moving average line.

 

 

That image is a graphical icon that gives an idea visually of what a golden cross looks like according to the depiction of moving average lines.

The golden cross occurs when the golden "50" line crosses over the green "200" line.

 

What Does a Golden Cross Look Like On A Stock Chart?

The image below is an example of a stock chart where a golden cross has occurred.

 

 

The price bars on a stock chart don't always make it obvious when a golden cross has occurred. The reason is that the moving averages being used each cover a long period of time (50 days and 200 days, respectively), which means any individual day of price activity has a limited effect on either moving average's value.

In general, though, when looking at a chart over a larger time frame, one should expect to see that the prices are trending upward overall when a golden cross occurs. The chart in the image above demonstrates that.

You can also see two golden lines on that chart. They represent the two respective moving averages, and you can see where they cross over each other.

 

How Do Traders Use a Golden Cross?

The appearance of a golden cross indicates that the stock's price has started trending upward in the last couple of months compared to where it had been on average in the year prior.

Some see this as a signal that the stock will continue its uptrend and therefore could be worthy of buying.

Traders take advantage of this by simply buying a stock that just had a golden cross. It's one of the easiest trading strategies to implement.

 

Is a Golden Cross Bullish or Bearish?

Golden crosses are typically considered bullish, meaning that they might be an indication that the stock price is on the verge of going up after having been down earlier in the year.

Since a golden cross is considered bullish, it means traders might try to capitalize by going long (meaning that they would be buying instead of shorting).

 

How Do You Find Stocks With a Golden Cross?

You can find them by using our Golden Cross scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks with golden crosses.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock charts manually to find golden cross stocks.

 

Video About Golden Cross

Here's a video that explains the golden cross and gives examples:

 

Example of a Golden Cross Trading Strategy

For this example of a golden cross trading strategy, we're going to use a daily chart, where each price bar represents one day of price activity. That means it would be a swing trading strategy where the trade is designed to last more than one day but not for the long haul.

 

Entry for the Golden Cross Trading Strategy

The entry for this Golden Cross trading strategy will be as follows:

The entry criterion for our Golden Cross trading strategy is very simple.

 

Exit for the Golden Cross Trading Strategy

There are a lot of possibilities here for the exit.

For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.

Not everyone uses all three, and that's totally fine. Ultimately, you can set these values however you want. But for the purposes of this strategy example, we will define all three:

 

1. Profit Target

We will set the profit target at 3 ATRs away from the entry price.

ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.

Our profit target criterion indicates that we will take the ATR value of the stock, multiply it by 3, and add it to the price we paid when we bought the stock. That will be our profit target and we can set up a sell limit order at that price.

2. Stop Loss

We will set the stop loss at 3 ATRs below our entry price. This means we take the ATR value of the stock, multiply it by 3, and subtract it from our entry price.

That will be our stop loss and we can set up a stop order at that price.

3. Time Limit

We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven calendar days after entry.

 

How Well Do Golden Crosses Actually Work?

The idea of a golden cross trading strategy sounds nice to many people because it offers a clear, easy-to-understand way to find and manage a trade setup.

But does it actually work? Can traders indeed generate profits by buying stocks that have a golden cross?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that trades based on golden crosses are not always profitable, but many times they are. For certain stocks, they might have a particularly strong track record of success according to our backtest research.

Here is some data that shows how a proprietary golden cross trading strategy we created has performed historically according to backtests:

 

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Anyone who signs up for our swing trading scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Golden Crosses

You can contact us any time if you would like to ask any questions about golden crosses or anything else related to the stock market.