Forex Investing: How To Use The Golden Cross

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Forex Investing: How To Use The Golden Cross

The golden cross is well known among currency traders, although it is seldom used. In reality, the golden cross is one of those technical forms that is underappreciated by the analytical community. However, when used appropriately, it may be one of the finest indications of a shift in foreign currency market patterns.

What Is a Golden Cross?

A golden cross is a bullish technical pattern that suggests rising momentum in a current trend or a possible reversal in a market that is downtrending. This pattern is often caused by a crossing of moving average lines or various signal lines in technical oscillators such as Slow Stochastics or MACD (moving average convergence divergence oscillator).

A trader may employ a golden cross by identifying the shorter-term moving average or signal line rising above the longer-term component. As current or short-term prices increase, the shorter-term component will inevitably climb above long-term average prices. As trend momentum grows, this will assist to sustain further higher prices in the short run. Consider the following golden cross configuration.

A 15-minute chart of the EUR/USD currency pair is shown in Figure 1. Following a sharp drop from 1.4870, the currency challenged 1.4760, a crucial support level at the moment (left side of the chart).Take note of how the golden crosses in the slow stochastic oscillator to the left of the chart were able to confirm long EUR/USD buy entry (as the purple line crosses the yellow line upward).Even better, the second golden cross pays off as the currency rate jumps to a high of 1.4889. (over 100 pips above the support level).

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Figure 1: The golden crosses in the slow stochastic oscillator offer great long buy entries.

Image by Sabrina Jiang © Investopedia2021

Applying Filters and Indicators

Now, the golden cross formation seems simple, but as with everything else in strategy and technical analysis, having buffers or filters in addition to the primary signal is always a good idea. This manner, there is more confirmation to consider before placing your buy or sell order.

Figure 2 shows another golden cross possibility when utilizing the slow stochastic. Moving averages are being utilized to confirm a change in the EUR/CAD trend this time. On the left side of our hourly chart, we can see that strong support has been created around 1.3664. (multiple session low).This carries over to the right side of our chart, where the EUR/CAD is set to retest this level after failing to breach resistance at 1.3957.

Figure 2: EUR/CAD golden cross opportunity.

Image by Sabrina Jiang © Investopedia2021

Figure 3 shows a closer, more thorough look at this. Take note of how the golden cross outperforms the price action in predicting a negative trend change. This is confirmed by another golden cross in the 10 and 25 simple moving averages.

Figure 3: A closer look at our EUR/CAD opportunity.

Image by Sabrina Jiang © Investopedia2021

We enter at 1.3750 and set a stop loss at 1.3600, 150 pips lower. The broad stop is used to ensure that the position is not halted at the support level. After some time, the trade eventually goes in our favor, and we benefit from the combination of a golden cross and a simple moving average filter. The EUR/CAD current market rises as predicted after rebounding from the 1.3664 support level. Figure 4 demonstrates that our trade meets our required 2-to-1 risk/reward ratio by advancing directly above our take-profit target at 1.4050 before backtracking.

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Figure 4: EUR/CAD rises to top out at 1.4171.

Image by Sabrina Jiang © Investopedia2021

The golden cross arrangement is also compatible with the frequently utilized Bollinger Bands®.

A closer look at the AUD/USD in the 60-minute time frame reveals another potential to use the golden cross technical pattern. The currency has been trapped in a short-term range, testing support at 1.0428. (Figure 5).

Figure 5: Golden crosses can be used with Bollinger Bands®.

Image by Sabrina Jiang © Investopedia2021

Using our Bollinger Band® program on the chart, we can observe that the next support level test aligns with the lower band. This is an excellent confirmation of a purchase signal since it corresponds to the golden cross in the slow stochastic oscillator (right side of the chart).As a result of the close proximity of the two confirmations (lower band and support level), the trade entry is set at 1.0450. The stop order will be placed 50 pips away, which will assist us reduce our risk if the range bound price movement breaks down through our support barrier.

As a consequence, there is a strong long buy entry in a trade with a risk-to-reward ratio of 6 to 1. The AUD/USD currency pair skyrockets in Figure 6, eventually settling at 1.0757, providing a more than 300-pip profit on the bet.

Figure 6: Golden Cross and Bollinger Bands® together.

Image by Sabrina Jiang © Investopedia2021

The Bottom Line

The key to effectively using the golden cross—along with other filters and indicators—is to always employ appropriate risk criteria and ratios. Remembering to constantly maintain a positive risk-to-reward ratio and to correctly timing your transaction may lead to greater returns than just following the cross blindly.

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It’s simple to understand why the golden cross appeals to certain hedge fund managers and currency traders. It is not only user-friendly, but it is also dependable when used correctly. It’s merely another approach to benefit in a 24-hour market by using a basic technical tool (included in practically any charting product).

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