Introduction
Chart patterns are abundant when it comes to technical analysis. We have already talked about them in A Beginner’s Guide to Classical Chart Patterns, and 12 Popular Candlestick Patterns in Technical Analysis. However, there are many other patterns out there that can be useful for day traders, swing traders, and long-term investors. The golden cross and the death cross are two good examples.
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. For example, a 200-day moving average will measure the average price of the asset in the last 200 days. If you’d like to read more about moving averages, we have an article about them: Moving Averages Explained.
So, what is a golden cross and a death cross, and how can traders use them in their trading strategy?
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.
A golden cross indicating a new uptrend in Bitcoin.
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.
So far, we’ve considered a golden cross with what’s called a simple moving average (SMA). However, there is another popular way to calculate a moving average called the exponential moving average (EMA). This uses a different formula that puts a higher emphasis on more recent price action.
EMAs can also be used to look for bullish and bearish crossovers, including the golden cross. As EMAs react more quickly to recent price movements, the crossover signals they produce may be less reliable and present more false signals. Even so, EMA crossovers are popular among traders as a tool for identifying trend reversals.
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.
A death cross confirming a downtrend in Bitcoin.
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 1929 or 2008. However, it may also provide false signals, for example, in 2016.
False death cross crossover signal on the SPX in 2016.
As you can see on the example, the market printed a death cross, only to resume the uptrend and print a golden cross shortly after.
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.
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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.
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.
Something many traders will also look for when trading golden crosses and death crosses is the trading volume. As with other chart patterns, the volume can be a strong tool for confirmation. As such, when a volume spike accompanies a crossover signal, many traders will be more confident that the signal is valid.
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
We’ve discussed some of the most popular crossover signals – the golden cross and the death cross.
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.
Do you have more questions about trading crossover signals like the golden cross and death cross? Check out our Q&A platform, Ask Academy, where the community will answer your trading questions.
