List of contents
Introduction
What is a golden cross?
What is a death cross?
Golden cross vs. death cross - What's the difference?
How to trade with golden cross and death cross
Closing
Introduction
When talking about technical analysis, there are many types of chart patterns. We've covered them in our Beginner's Guide to Classic Chart Patterns, and 12 Popular Candlestick Patterns in Technical Analysis. However, there are many other patterns that are useful for day traders, swing traders, or long-term investors. There is also a golden cross and a death cross.
Before we dive into the golden cross and death cross, we need to understand what a moving average (MA) is. In short, MA is a line plotted on a price chart that measures the average price of an asset for a certain time period. For example, a 200-day moving average will measure the average price of an asset in the last 200 days. If you want to read more about moving averages, check out Moving Averages Explained.
So, what are golden crosses and death crosses, and how do traders use them in their trading strategies?
What is a golden cross?
A golden cross (or golden crossover) is a chart pattern that occurs when a short-term moving average crosses above a long-term moving average. Typically, the 50-day MA is used as a short-term average, and the 200-day MA is used as a long-term average. However, this is not the only way to describe the golden crossover. It can occur on any time frame, the basic idea is that the short term average crosses the long term average.
Usually, the golden cross occurs in three phases:
The short-term MA is below the long-term MA during a downtrend.
The trend reverses, and the short-term MA crosses above the long-term MA.
An uptrend starts where the short-term MA remains above the long-term MA.
Golden cross signals Bitcoin's new uptrend.
In many cases, a golden cross can be considered a bullish signal. How could that be? The idea is simple. We know that moving average measures the average price of an asset over a planned duration. In this case, when the short-term MA is below the long-term MA, it means that the short-term price action is bearish compared to the long-term price action.
Now, what happens when the short-term average crosses above the long-term average? The short-term average price is higher than the long-term average price. This indicates a potential shift in the direction of the market trend, and this is why the golden cross is considered bullish.
In the conventional interpretation, the golden cross is a crossing of the 50-day MA above the 200-day MA. However, the general idea behind the golden cross is that the short-term moving average crosses above the long-term moving average. In this sense, we can also have golden crosses that occur on other time frames (15 minutes, 1 hour, 4 hours, etc.). However, signals on higher time frames tend to be more reliable than signals on lower time frames.
So far, we have seen the golden cross with the so-called simple moving average (SMA). However, there is another popular way to calculate moving averages, called the exponential moving average (EMA). Uses a different formula, giving more emphasis to more recent price action.
EMA can also be used to look for bullish and bearish crossovers, including golden crosses. Because the EMA reacts more quickly to recent price movements, the resulting crossover signals may be less reliable and provide more false signals. Even so, EMA crossovers are popular among traders as a tool for identifying trend reversals.
What is a death cross?
The death cross is basically the opposite of the golden cross. This is a chart pattern where the short-term MA crosses below the long-term MA. For example, the 50-day MA crosses below the 200-day MA. Thus, a death cross is usually considered a bearish signal.
Typically, death cross occurs in three phases:
The short-term MA is above the long-term MA during an uptrend.
The trend reverses, and the short-term MA crosses below the long-term MA.
A downtrend starts when the short-term MA remains below the long-term MA.
Death cross confirms Bitcoin downtrend.
Now that we understand what a golden cross is, it's pretty easy to understand why a death cross is a bearish signal. The short-term average crossed below the long-term average, indicating a bearish outlook in the market.
Death crosses have given bearish signals before major economic crashes in history, such as in 1929 or 2008. However, they may also give false signals, for example, in 2016.
False SPX crossover death signal in 2016.
As you can see in the example, the market formed a death cross, only to continue the uptrend and form a golden cross shortly after.
Golden cross vs. death cross - What's the difference?
We've covered both, so the difference isn't hard to understand. The two are essentially at odds with each other. The golden cross can be considered a bullish signal, while the death cross is a bearish signal.
Both can be confirmed by high trading volume. Some technical analysts may also examine other technical indicators when observing the crossover context. Common examples include the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI).
What is also important to remember is that moving averages are lagging indicators and have no predictive power. This means that both crossovers will usually provide strong confirmation of a trend reversal that has already occurred – rather than a reversal that is still in progress.
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How to trade with the golden cross and the death cross
The basic idea behind these patterns is pretty straightforward. If you know how traders use MACD, you will easily understand how to trade with these crossover signals.
When we talk about conventional golden crosses and death crosses, we usually look at daily charts. So, a simple strategy could be to buy at the golden cross and sell at the death cross. In fact, it's been a relatively successful strategy for Bitcoin in recent years – despite a lot of false signals along the way. Thus, blindly following one signal is usually not the best strategy. So, in market analysis techniques, you may want to consider other factors.
If you want to read about an easy strategy for building long-term positions, check out Dollar-Cost Averaging (DCA) Explained.
The crossover strategy mentioned above is based on crossing daily MAs. So, what about other time periods? It's the same for golden crosses and death crosses, and traders can take advantage of this property.
However, as with most other chart analysis techniques, signals on higher time frames are stronger than signals on lower time frames. A golden cross may occur on a weekly time frame while you see a death cross occur on an hourly time frame. This is why looking further or zooming out and seeing the bigger picture on the chart will really help you in considering a course of action.
Something that many traders look for when trading golden crosses and death crosses is trading volume. As with other chart patterns, volume can be a powerful tool for confirmation. Thus, when a spike in volume accompanies a crossover signal, many traders will be more confident that the signal is valid.
If a golden cross occurs, the long-term moving average can be considered a potential support area. On the other hand, if a death cross occurs, it can be considered a potential resistance area.
Crossover signals can also be checked with signals from other technical indicators to look for confluence. Confluence traders combine multiple signals and indicators into one trading strategy in an attempt to create reliable trading signals.
Closing
We have discussed some of the most popular crossover signals – golden cross and death cross.
A golden cross occurs when the short-term moving average crosses above the long-term moving average. A death cross occurs when the short-term MA crosses below the long-term MA. Both are used as reliable tools to confirm long-term trend reversals, be it in the stock, forex or crypto markets.
Do you have further questions regarding crossover trading signals such as the golden cross and death cross? Check out our question and answer platform, Ask Academy, a place where the community will answer your questions about trading.