On the left side of this daily Forex chart, the market would be considered a downtrend as the 50 SMA is trading below the 200 SMA.
The yellow circle highlights where the 50 day moving average crosses above the 200 day moving average. The golden cross definition can be:
When the short term moving average, the 50 period SMA crosses the longer term 200 period SMA to the upside, the golden cross has occurred and we can consider a bull market. Simple Moving Average Formula
Traders should understand that there is no magic in moving averages. They are mathematical calculations and the simple moving average is the easiest one to calculate.
Using a 3 day moving average as an example, we take the prices of the last 3 days, add them together and divide them by 3:
- This day the price is 1.85
- This day the price is 2.10
- Today the price is 2.76
The calculation for the SMA is 1.85+2.10+2.76/3 = $2.23. On the open of the fourth day, the moving average would be plotting at $2.23.
- The calculation for the 50 period moving average for the golden cross will take the sum of the closing prices of the past 50 days and divide by 50
- The 200 period moving average would take the sum of the closing prices of the last 200 days, divided by 200.
The 50 and 200 periods are nothing special except we are looking at a short term trend direction compared to a long term trend direction.
You can use different combinations close to those two numbers and see virtually the same results. Golden Cross Trading – Does It Work?
Using the golden cross as part of a technical analysis approach may appear to make sense. After all, the talking heads like to refer to it and we are using a well known technical indicator.
- Does the golden cross in trading have any predictive power?
- Do stocks engage in powerful bull trends after the golden cross occurs on the S&P?
- Do all liquid markets react positively to this trading event?
Charles Schwab is a popular financial firm and their chief investment strategist, Liz Sonders, reported to their clients that "Performance following Golden Crosses was no better than the performance over any random time period."