Golden Cross vs. Death Cross: The Ultimate Guide

Technical analysis terms include the death cross and golden cross. Golden Crosses and Death Crosses both represent the same concept. One is a trend upward, and the other is a trend downward.

Introduction

In regards to technical analysis is concerned, presently, there are many chart patterns to choose from. The basis of technical analysis is the customization of statistics to sort trading decisions. There is a great deal of data used by technical analysts to analyze stocks and markets, often in charts. These patterns help traders recognize what a stock's performance might mean in the future. The fact is that there are numerous other patterns out there that day traders, swing traders, and long-term investors can utilize. Golden crosses vs. Death crosses are good examples.

Crosses that point downward indicate a long-term bear market going forward, while upward crosses indicate a long-term bull market. In both cases, a short-term moving average crosses over a significant long-term moving average to confirm a trend. As markets become increasingly complex, hundreds of different types of technical analysis indicators have developed in recent decades, but few have become as widespread and consistent as moving averages.

What Is the Moving Average?

On a price chart, the Moving Average is a line that represents the asset's average price over a certain period. Most traders use 15, 20, 30, 50, 100, and 200 days to calculate moving averages. However, you can choose the timeframe for your moving average chart based on your trading objectives and strategy.

Now let's talk about the death cross and the golden cross. Each crossover signal occurs when two different moving averages cross in a specific manner. Regardless of the variations, the purpose of moving averages is to create clarity in trading charts. A trend indicator is developed by smoothing out Interpret the graphs to make them easier to understand. Indicators based on moving averages are called lagging indicators because they rely on previous data. Nevertheless, they have a great deal of power to cut through the noise and help identify market trends.

What Is a Golden Cross?

A short-term is moving average crosses above a long-term moving average, it is called a golden cross. Golden crosses are commonly used as indicators of market uptrends. Short-term moving averages are typically calculated using the 50-day Moving Averages, while long-term moving averages are calculated using the 200-day Moving Averages. However, a number of different ways are accomplished in a golden crossover. Crossovers do not have a definite time frame, and they can occur at any point in time.

The golden cross consists of three phases:

• Short-term moving averages are below long-term moving averages during a downtrend.

• Crossover between short-term and long-term moving averages when the trend reverses.

• Uptrends begin when Short-term moving averages are higher than long-term moving averages.

In Bullish signals such as a golden cross are common in many cases. This implies that golden crosses could also happen in other time frames. Signals with a higher time frame are still more reliable than those with a lower one. Bullish and bearish crossovers can also be detected with EMAs, including the golden cross. 

What is a Death Cross?

Death crosses are the exact opposite of golden crosses in that they indicate a downward trend in the market. Unlike the golden cross, a death cross is the result of a short-term average crossing under the longer-term average when it goes down. The 50-day and 200-day moving averages are commonly used as the shorter- and longer-term moving averages for death crosses.

Death crosses typically occur in three phases:

• Short-term moving averages are higher than long-term moving averages during an uptrend.

• Short-term moving average crosses below long-term moving average as the trend reverses.

• Short-term moving averages below long-term moving averages indicate a downtrend.

Death crosses indicate bearishness, as is easily understood. Since the short-term average has crossed below the long-term average, this indicates a bearish outlook.

Prior to major economic downturns, such as in 1929 and 2008, the death cross has served as a bearish signal. In 2016, for example, a false signal may have been sent.

Examples of the Golden Cross

The golden cross breakout signals can be combined with various momentum oscillators like stochastic, moving average convergence divergence, and relative strength index to identify when an uptrend is overbought and oversold. These indicators help pinpoint when it is best to buy and sell.

The 50-day MA crosses above the 200-day MA, which is the first buy signal based on a daily close. When the next price bar starts at 1.1294, the trade is placed. The trade is open as long as the 50-day MA stays below the 200-day MA.

This occurred almost a year after the above example. During trading, the price was 1.1776. With a spread betting trade, a trader who risks £1 per pip profited £482 ((1.11776 - 1.1294) x £1).

It didn't go as well for the next golden cross. At the time of the bullish crossover, we took the trade at the beginning of the next candle at 1.2090. After two or more months later, the sell signal was issued at 1.1866. With a risk of £1 per pip, a spread bet trade would result in a loss of £224 ((1.1866-1.2090) x £1).

When calculating profit/loss, overnight holding costs or credits must also be considered, increasing or decreasing the return. A currency pair's holding costs are affected by its interest rate (in this case, EUR/USD). The overnight holding costs for this bet size was £0.56 per day at the time of these trades.

Examples of the Death Cross

Moving averages are regarded as a trend indicator that provides support or resistance in the market. When moving through each other, moving averages can also provide trading signals. Crossovers of moving averages are referred to as such signal.

A Crossover signals are generated when the short-term moving average crosses over the long-term moving average. Death crosses are highly bearish signs, indicating that the current downtrend will persist for some time. Short-term moving averages crossing below longer-term moving averages are considered to sell signals by technical analysts.

Following are two examples of death crosses based on the UK 100 stock indexes. We use one-minute charts and 200-minute and 50-minute moving averages in these examples. Since trades typically last several hours or less, a shorter timeframe helps to reduce overnight holding costs.

A short on the death cross was entered at 7164.87 and was exited at 7169.97. If the trader had risked £10 per point, the trade would've resulted in a loss of £51 ((7164.87 - 7169.97) x £10).

If you risk £10 per point on the second trade, you profit £181.90. 7162.40 is the entry level, 7144.21 is the exit level.

How to Trade the Golden Cross and the Death Cross?

The basic concept behind these patterns is quite simple. You'll be able to trade the crossover signals if you understand how traders use the MACD.

We typically look at the daily chart when discussing the conventional golden cross and death cross. Buying at a golden cross and selling at a death cross would be simple. The last few years would have been relatively successful for this type of strategy for Bitcoin. Even so, there were plenty of false signals along the way. It is not a good strategy to blindly follow one signal. If you are considering market analysis techniques, you may want to consider other factors. Traders can take advantage of both gold crosses and death crosses. As with most chart analysis techniques, the signals are stronger on higher time frames.

You may be looking at a golden cross on a weekly timeframe while you are looking at a death cross on an hourly basis.

The trading volume is also a factor traders consider when trading golden crosses and death crosses. The volume also can be used as a confirmation tool, just as it can be with other chart patterns. Consequently, traders will be more confident about crossover signals when a volume spike is associated with them.

In the event of a golden cross, the long-term moving average may be considered as a potential support area. On the other hand, a death cross may be regarded as a potential resistance area.

You can also compare crossover signals with signals from other technical indicators to look for confluence. The convergence strategy combines multiple signals and indicators into one trading strategy to improve the accuracy of trading signals.

Golden Cross Trading Strategies

For Golden cross trading, three strategies are presented:

1. Find the setups after a long downtrend

There is no universal golden cross setup. To find a stock poised to rise, look for a stock with a long sustained downtrend. Considering the bearishness of the stock, the signal is highly significant as a reversal signal.

The signal is powerful because it occurs after a multi-month downtrend. In order to get a bullish cross after a bearish trend for so long, there must be a basing period. Bulls and bears are fighting during this basing period.

Don't get married to the stock if you get that initial breakout after the base. Secure your gains by buying when the stock rises.

2. Don't use wide moving average spreads

There are times when the averages are widely spread. As a result, the averages will present a cup-and-handle formation. It looks bullish from the surface.

You will notice that the price action is unhealthy if you examine the chart. At the moment, the price is heading straight up. Usually, it will reverse.

Price movement cannot be ignored. We should take caution when dealing with parabolic reversals. An overhead gap that provides resistance is especially problematic.

Golden crosses of this type may be best avoided. There are better opportunities on the market where there are smoother, less volatile entry signals, so this might be considered a valid golden cross.

As traders, we must keep in mind that there are times when the best action is to take none at all.

3. Combine Golden Cross with Double Bottom Pattern

Last but not least, we'll look at the combination of a double bottom chart formation and a golden cross.

This is how it is set up.

• Charts with a double bottom are a good sign. If second low is lower than the first, it is promising.

• Observe the golden cross formation next. In addition, wait until the price retests the 200 simple moving averages.

• With a stop below low of the double bottom, you want to buy the test of the 200 moving average.

This formation is illustrated in the chart below.

Death Cross Trading Strategies

Using the double death cross strategy, you can predict when the death cross signal will occur by adding one more moving average. The 100-day moving average is situated between the other two moving averages and is a medium-term MA.You can apply the double death cross strategy to your favorite asset classes as long as the risk can be defined and limited.

Check guide on how to trade double death crosses signals:

Step #1: As soon as the 50-day EMA(exponential moving average) crosses below the 100-day EMA, buy the stock. Prices must also converge between the moving averages. 

Identifying the risk is easy if the crossover of the 50-day MA (blue line) and 100-day MA (orange line) occurs simultaneously as the price is testing those moving averages, as shown in the chart below for GBP/USD.

We will now determine the best entry strategy of the double-cross trading strategy.

Step #2: Using our multi-entry strategy, Sell1 when our 50- and 100-day moving averages close below each other. Then Sell2 when the 200-day moving average breaks and closes below the 50-day moving average.

It is best to approach the death cross signal by using multiple entries to improve your average entry price. When we are looking to capture a large price movement in a currency pair, we prefer to scale into the position. Once we close below 50-day and 100-day moving averages, we initiate the first half of the trade.

The moment we close below the two moving averages when the death cross forms, sell at the market. Once we break below the 200-day moving average and close below it, we will enter the second half of our position.

Next, we must decide where to place our protective stop loss in our long-term trading strategy.

Step #3: Keep your protective Stop Loss above 50 and 100 days moving averages

When we trade, we need to define our risk. Trading successfully requires a limited risk profile. We can assume this is yet another false trade signal if the price moves back above those moving averages. We're risking a little bit in this trade case scenario, but the reward could be much more significant.

Above the 50-day MA and 100-day MA is the best place to hide your protective stop loss.

Last but not least, we must define where profits are taken.

Step #4: Two-step take-profit process: Mark the high of the candle when the 50-day MA crosses below the 200-day EMA on your chart. Once the candle breaks the high, take profits.

It is complicated, but you will see why we chose this strategy after breaking down the steps you need to follow. The first thing you should remember is what we said at the beginning of the article, namely that a false death cross signal will occur if the price doesn't converge with the two moving averages. You only need to mark the candle's high at the time of the death cross and take profit as soon as it is broken.

We used the death cross strategy for a SELL trade in the example above. You should also apply this strategy to a BUY trade. This is known as the golden cross strategy. A BUY trade is shown in the figure below.

What's the Difference: Golden Cross vs. Death Cross?

A golden cross is totally different and opposite of a death cross. A golden cross indicates a long-term bull market to come, while a death cross implies a long-term bear market.

When a high trading volume follows a golden cross vs. death cross, however, both are deemed far more significant. The long-term moving average is seen as a major support level for the market when a golden cross occurs. The longer-term moving average is also considered a resistance level when it's a death cross.

As a crypto trader, moving averages are lagging indicators, so you must keep this in mind. The golden cross and death cross are only robust confirmations of trend reversals that have already occurred and not ones still occurring.

Final Thoughts

Golden crosses occur when a short-term moving average crosses above a long-term moving average. Short-term MA crossings below long-term MAs constitute a death cross. Whether it's the stock market, forex, or cryptocurrency, they can both be used to confirm long-term trend reversals. A golden cross indicates a long-term bull market going forward, while a death cross indicates a long-term bear market. High trading volumes make both crossovers more significant. The long-term moving average becomes a significant support (in the case of a golden cross) or resistance level for the market once the crossover occurs.