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THE GOLDEN AND DEATH CROSSES

A golden cross and a death cross are exact opposites. A golden cross indicates a long-term bull market going forward, while a death cross signals a long-term bear market. Both refer to the solid confirmation of a long-term trend by the occurrence of a short-term moving average crossing over a major long-term moving average.

KEY TAKEAWAYS

A golden cross suggests a long-term bull market going forward, while a death cross suggests a long-term bear market.

Either crossover is considered more significant when accompanied by high trading volume.

Once the crossover occurs, the long-term moving average is considered a major support level (in the case of the golden cross) or resistance level (in the instance of the death cross) for the market from that point forward.

Either cross may occur as a signal of a trend change, but they more frequently occur as a strong confirmation of a change in trend that has already taken place.

Golden Cross

The golden cross occurs when a short-term moving average crosses over a major long-term moving average to the upside and is interpreted by analysts and traders as signaling a definitive upward turn in a market. Basically, the short-term average trends up faster than the long-term average, until they cross.

There are three stages to a golden cross:

A downtrend that eventually ends as selling is depleted

A second stage where the shorter moving average crosses up through the longer moving average

Finally, the continuing uptrend, hopefully leading to higher prices

Death Cross

Conversely, a similar downside moving average crossover constitutes the death cross and is understood to signal a decisive downturn in a market. The death cross occurs when the short-term average trends down and crosses the long-term average, basically going in the opposite direction of the golden cross.

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 bearish compared 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.

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.

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.

If you’d like to read about an easy strategy to build a longer-term position, check out Dollar-Cost Averaging (DCA) Explained.



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