Golden Crossover

What is the Golden Crossover Indicator?

Golden Crossover, or the Golden Cross, is a technical indicator used extensively by short-term traders and patient investors in the Indian stock market. With thousands of listed stocks to choose from, indicators such as the Golden Cross have become a crucial tool for analysing the trend in stocks and timing the entry and exit.

Simply put, the Golden Cross indicator is an intersection of a short-term moving average (50-day moving average) and a long-term moving average (200-day moving average) of a stock. It can be identified when the 50-day moving average (50-DMA) line of security crosses and moves above the 200-day moving average (200-DMA) line.

The name of this indicator - “Golden Crossover”, comes from the prolonged conclusion of stock market participants that when there is a Golden Cross visible on stock charts, the price of that stock is likely to move in a bullish trend, and it may be a right time to take entry in the market.

An important thing to note here is that it is not necessary that a Golden Cross is formed only when the 50-DMA crosses above the 200-DMA. It can also be formed using the average prices for shorter time frames, such as 15, 20, or 40 days. A Golden Cross with a shorter time frame is usually used by day or short-term traders to perform trading in various financial assets.

• Golden Cross is a technical indicator used by stock market participants to identify an upward trend in a stock.
• It is formed when a short-term moving average of an asset crosses the long-term moving average in an upward direction.
• When a Golden Cross is formed on a chart, it indicates that the asset or stock has entered into a bullish trend.

What is a Death Cross?

Death cross is the immediate opposite of the Golden Cross indicator. Death Cross for a stock occurs when a short-term moving average (50-day moving average) intersects and moves below a long-term moving average (200-day moving average) on a stock chart.

Unlike the Golden Crossover, the Death Cross is a bearish technical indicator. Its occurrence indicates that a particular security has initiated a move in a bearish trend, and the price may plunge until there is a further trend reversal.

Death Cross is helpful for short sellers or investors who are looking to sell their stock holdings and are waiting for an indication of a possible downward trend in prices.

• Death Cross is a negative version of the Golden Cross.
• The occurrence of Death Cross indicates that a stock has entered a bearish trend.
• It is formed when a short-term moving average of an asset crosses below the long-term moving average.

What Are the Three Stages of Golden Cross?

The movement of a Golden Cross indicator can be distributed into three significant phases:

1. The first phase initiates when a downward trend of security starts to show signs of reversal. This possible reversal occurs because the buyers are getting stronger and are trying to overpower the sellers by pushing the price upwards.
2. The second phase takes place when the 50-day moving average (50-DMA) crosses the 200-day moving average (200-DMA) from below and moves above it. Once this intersection occurs, a Golden Crossover is formed, indicating that a stock has moved into a bullish trend.
3. The third and final phase is the period of prolonged bull momentum in the stock prices. During this phase, both the moving averages, 50-day and 200-day, act as support levels for future downward price movement.

• First Phase - The downtrend of security is in a reversal phase.
• Second phase - The short-term moving average has crossed above the long-term moving average.
• Third Phase - The upward or bull trend has sustained for a prolonged period.

Limitations of the Golden Cross Indicator?

The Golden Cross is often known as a lagging indicator because it is based on the previous price. Since it considers past prices, it falls behind and provides a late indication about an upcoming bull trend.

Golden Crossover, as a sole indicator of a trend reversal, may push you towards the wrong entry zone, inviting unexpected losses because of buying a stock at a false breakout or price level. Therefore, to maximise the earning potential, Golden Cross should be used in conjunction with other indicators such as RSI and Volume Trends.

• The Golden Cross falls behind in, indicating an upward trend. Investing solely based on the Golden Cross indicator can be risky due to its lagging attribute. 
• It is based on past price levels.

Benefits of the Golden Cross Indicator?

1. Indicator of Prolonged Momentum - The Golden Cross indicates that the upward momentum in the stock market will be sustained for a longer period till the trend reverses. During such upward momentum, investors are able to make substantial returns.
2. Creates Support Level - When a 50-day moving average (50-DMA) crosses the 200-day moving average (200-DMA) from below to above, then these moving averages become the support level for a trade setup. This helps investors avoid excess losses in case of a downfall in prices.
3. Reduced Risk - A typical Golden Cross, such as the 50-day and 200-day moving averages, are less affected by short-term price fluctuation and thus can offer risk-managed analysis to investors.

Key Takeaways On Golden Cross Indicator

• Golden Cross is a technical indicator used by stock market participants to identify trend reversals in stocks. 
• It is formed when the 50-day moving average (50-DMA) crosses the 200-day moving average (200-DMA) from below to above.
• The formation of the Golden Cross indicates that a stock price is now moving in an upward direction. 
• The opposite of the Golden Cross is the Death Cross, which depicts the start of a downward trend in stocks. 
• Unlike the Golden Cross, the Death Cross is formed when a 50-DMA crosses below the 200-day moving average 200-DMA.