Chart patterns are abundant when it comes to technical analysis. Before we get into what a golden cross and a death cross are, we need to understand what a moving average (MA)is. In short, it’s a line plotted over a price chart that measures the asset’s average price for a given time frame.
So, how to read 50 day moving average? This article will show you all about moving average.
What is a golden cross?
A golden cross(or golden crossover) is a chart pattern that involves a short-term moving average crossing above a long-term moving average. Typically, the 50-day MA is used as the short-term average, and the 200-day MA is used as the long-term average. However, this isn’t the only way to think about a golden crossover. It can happen in any time frame, and the basic idea is that a short-term average crosses over a long-term average.
Typically, a golden cross happens 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 stays above the long-term MA.
In many cases, a golden cross may be considered a bullish signal. How come? The idea is simple. We know that a moving average measures the average price of an asset for the duration that it plots. In this sense, when a short-term MA is below a long-term MA, it means that the short-term price action is bearishcompared to the long-term price action.
Now, what’s happening when the short-term average crosses above the long-term average? The short-term average price goes higher than the long-term average price. This indicates a potential shift in the direction of the market trend, and this is why a golden cross is considered bullish.
In the conventional interpretation, a golden cross involves the 50-day MA crossing above the 200-day MA. However, the general idea behind the golden cross is that a short-term moving average crosses over a long-term moving average. In this sense, we could also have golden crosses happening on other time frames (15-minute, 1-hour, 4-hour, etc.). Still, higher time frame signals tend to be more reliable than lower time frame signals.
What is a death cross?
A death cross is basically the opposite of a golden cross. It’s a chart pattern where a short-term MA crosses below a long-term MA. For example, the 50-day MA crosses below the 200-day MA. As such, a death cross is typically considered to be a bearish signal.
Typically, a death cross happens 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 stays below the long-term MA.
Now that we understand what a golden cross is, it’s fairly easy to understand why a death cross is a bearish signal. The short-term average is crossing below the long-term average, which indicates a bearish outlook on the market.
The death cross has provided a bearish signal before major economic downturns in history, such as in 1929or 2008. However, it may also provide false signals, for example, in 2016.
Golden cross vs. death cross - what’s the difference?
We’ve discussed both of them, so the difference between them isn’t difficult to understand. They are essentially the polar opposites of each other. The golden cross may be considered a bullish signal, while the death cross a bearish signal.
Both of them can be confirmed by high trading volume. Some technical analysts may also check other technical indicators when looking at the crossover context. Common examples include the Moving Average Convergence Divergence (MACD)and the Relative Strength Index (RSI).
What’s also important to remember is that moving averages are lagging indicators and have no predictive power. This means that both crossovers will typically provide a strong confirmation of a trend reversal that has already happened– not a reversal that’s still underway.
How to trade the golden cross and the death cross
The basic idea behind these patterns is quite straightforward. If you know how traders use the MACD, you’ll easily understand how to trade these crossover signals.
When we’re talking about the conventional golden cross and death cross, we’re usually looking at the daily chart. So, a simple strategy could be to buy at a golden cross and sell at a death cross. In fact, this would have been a relatively successful strategy for Bitcoin in the last few years – though there were many false signals along the way. As such, blindly following one signal is typically not the best strategy. So you might want to consider other factors when it comes to market analysis techniques.
The crossover strategy mentioned above is based on daily MAs crossing. But what about other time periods? Golden crosses and death crosses happen just the same, and traders can take advantage of them. However, as with most chart analysis techniques, signals on higher time frames are stronger than signals on lower time frames. A golden cross may be happening on the weekly time frame while you’re looking at a death cross happening on the hourly time frame. This is why it’s always helpful to zoom out and look at the bigger picture on the chart, taking multiple readings into account.
Once a golden cross happens, the long-term moving average may be considered as a potential area of support. Conversely, once a death cross happens, it may be considered as a potential resistance area.
Crossover signals may also be crosschecked 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 make the trade signals more reliable.
Closing thoughts
A golden cross involves a short-term moving average crossing above a long-term moving average. A death cross involves a short-term MA crossing below a long-term MA. They both can be used as reliable tools for confirming long-term trend reversals, whether it comes to the stock market, forex, or cryptocurrency.
We’ve discussed how to read 50 day moving average in the above article. Hope you can get a basic understanding about moving average.
