Before discussing the golden cross, let’s discuss its primary component known as moving averages (MAs).

A moving average records the average change in the price of an asset over a specified period. Mathematically, it is measured after adding up a group of prices (recorded in a specific time frame like hourly, four-hour, daily, weekly, monthly, etc.) – and dividing the sum by the number of prices in the group.

Moving average examples
Traditionally, golden cross watchers focus on two specific moving averages: the 50-day moving average, which becomes the short-term moving average, and the 200-day moving average as the long-term moving average.

The golden cross pattern forms when the short-term moving average crosses above the long-term moving average. In other words, the pattern shows that buying interest in a particular market has increased over the past 50 days compared to the previous 200 days.

golden cross illustration
How does the golden cross work?
Golden crosses usually precede significant price spikes across the traditional and cryptocurrency markets, which is a reason why traders view them as buy signals.

BTC/USD daily price chart showing a golden cross for March 2020 and a 750% rally thereafter. Source: TradingView
But there have been cases when gold crosses followed imaginary breakthroughs. Therefore, the golden cross pattern should be viewed along with other technical indicators before making a decision.

For starters, traders can use the Relative Strength Index (RSI), a momentum oscillator that identifies the overbought and oversold conditions of an asset, to predict a potential price pullback.

Related Topics: What is the Doji Candlestick Pattern and How to Trade It?

In February 2020, this strategy may have helped many traders avoid deeper losses. Let’s see why.

On February 1, 2020, Bitcoin’s 50 and 200 day moving average formed a golden cross when it traded around $9,500. A modest euphoria followed, and the price rose to $10,500 in the next two weeks. The period also saw Bitcoin’s daily RSI rise above the overbought threshold of 70.

BTC/USD daily price chart with fake golden cross breakout. Source: TradingView
Bitcoin’s overbought conditions led to a decline towards the 50 and 200 day EMA (range between $8,500 and $9,200). But its price eventually collapsed below $4,000 entering the month of March, in line with the global market crash led by the onset of the COVID-19 pandemic.

The case study shows that golden crosses are not 100% accurate in predicting future trends. Instead, they can only help traders and analysts by using momentum indicators as well as fundamentals to predict price movements in the short and long term.

These momentum indicators can include Moving Average Convergence Convergence (MACD), Stochastic RSI, Rate of Change (ROC), Average Directional Index (ADI), and others.

In other words, traders are advised not to buy too early in a golden cross formation. Alternatively, they can wait for the price to consolidate sideways or bearishly and find short-term support before deciding to enter a trade.

It is also possible to change the definition of a golden cross in volatile market conditions by changing the moving averages.

For example, using the 20-period moving average for the short-term moving average and the 50-period moving average for the long-term t. The 20-50-day moving average combination has historically helped traders identify short-term cryptocurrency market trends, as seen below in the bullish rally from March 2020 to November 2021.

BTC/USD daily price chart showing a 20-50 MA crossover. Source: TradingView
Golden crosses do not mean guaranteed gains
While golden crosses frequently do appear before major price rallies in the bitcoin and cryptocurrency markets, the risk of bulls being trapped remains.

Ultimately, traders should be careful with crossover signals, as following them blindly can lead to losses. As discussed above, false signals can occur and it is important to confirm any golden cross with additional technical indicators before making any trades.