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The golden cross strategy in forex

The golden cross is the graphic crossing of two moving averages at 50 and 200 days. Obviously, the time range of the mobile average can be customized, but when quoting the golden cross, the forex market always refers to 50-200 pair.

The reason is simple: the 50-day moving average represents a short-term trend and the 200-day one a long-term trend. A cross of the short average against the long term one generates a bullish / bearish signal of some relevance depending on whether this cut is formalized from the bottom to the top (bullish) or from the top to the bottom (bearish).

The advantage of this strategy is mainly to confirm a market trend that has already begun. The disadvantage is the fact that the signal usually develops when at least a third / half of the trend has already been crossed. A typical lagging indicator.

The moving average can be of different types (simple, exponential, geometric, etc...) and each of them has different inclinations and values. The trader does not get the absolute truth, but must choose the one that best suits his trading style. Here are some examples. The first graph is AudJpy. In this case, the golden cross that we notice is determined by the intersection of the 50 and 200 day exponential moving averages.

technical analysis golden cross

At the beginning of 2015 the short moving average of AudJpy crossed the long term one from the bottom to the top, starting a bear market that was only interrupted in December 2016 by another golden cross. The first thing we can observe in this example is obviously linked to the delay of the signal development. A delay needed to get technical confirmations. The second element is linked to the 200-day moving average. Basically, the signal is less likely to be false if the long average has already assumed the same trend of the 50 day average.

One of the tips that is always worth considering is that a Golden Cross confirmation can be strengthened if it is put beside other trading tools and / or price patterns.

Obviously, the golden cross is not a magic formula. So, let’s still check AudJpy to show the limits and especially the need to use appropriate money management techniques for this trading technique as well.

This usually happens when the market is close to a lateral phase.

technical analysis golden cross

Between 2010 and 2012, there were six golden crosses on AudJpy, but only a few of them allowed the trader to get some profit. In other cases the entry coincided with the top or the bottom of the period. Another tip quite useful with this technique is to absolutely avoid operating when the market is in a lateral phase. If you see figures forming rectangles or large triangles, let them go and look for other methodologies to get trading signals: you will avoid being stopped out of the market at stop loss.