The death cross and golden cross indicators are two relatively easy patterns to learn for traders learning technical analysis. Both indicators make use of two moving averages (MAs) to signal when price action turns bullish or bearish.
A moving average is a line plotted on a price chart that tracks the average price of an asset over a specific time frame. For example, a 50-day moving average will measure the average price over the past 50 days, updated every day as a rolling average. A short-term moving average exhibits choppier price movement while long-term moving averages, like a 200-day MA, are plotted as smoother, less volatile lines.
When searching for golden crosses and death crosses, a 50-day moving average and a 200-day moving average are typically used. However, you can adjust these MAs to best fit your trading strategy.
Keep reading to learn about the two indicators in more detail, how to spot them and examples of both the golden cross and death cross.
What is a death cross in trading?
A death cross is a chart pattern that occurs when a short-term moving average crosses below a longer-term moving average. The death cross signal is classified as a bearish signal, representing the beginning of a downtrend in price action.
The death cross indicates that price action has fallen during the term of your shorter moving average – about two months with the use of a 50-day MA. The shorter average, which represents more recent price action, has fallen below the longer MA, representing historical price action.
It can be helpful to think of this crossover in shorter time frames: if the value of an asset is higher yesterday and today than its average price over the last week, it must be rising in value. If the value of an asset is lower today than its average price over the past week, it must be falling in value.
How to spot a death cross ?
You can spot a death cross by identifying when the longer-term moving average crosses above the shorter-term moving average. The death cross occurs in three phases:
1. Sustained uptrend: The market’s price exhibits an uptrend where a 50-day moving average is above a 200-day moving average
2. Crossover: The price reverses and the 200-day moving average crosses over the 50-day moving average, beginning a downtrend and creating a death cross on the price chart
3. Bearish downtrend: The price continues its downtrend and the 200-day moving average remains above the 50-day moving average, confirming the downtrend
The death cross can present a fake signal, where the price action finds a bottom shortly after and rebounds on its upward trend.
What is a Golden cross in trading?
A golden cross is a chart pattern that occurs when a long-term moving average crosses below a shorter-term moving average. The golden cross is considered a bullish signal, representing the beginning of an uptrend.
A golden cross indicates when the price action enters a bull run and is the inverse of the death cross indicator.
How to spot a Golden cross ?
You can spot a golden cross by identifying when a short-term moving average crosses above a longer-term moving average. The golden cross occurs in three phases:
1. Sustained downtrend: The price action begins in a downward trend, with the 50-day moving average sitting below the 200-day moving average
2. Crossover: The 50-day moving average crosses above the 200-day moving average, signaling a reversal in price action to an uptrend and forming the golden cross on the price chart
3. Bullish uptrend: The uptrend continues and the 50-day moving average remains above the 200-day moving average, confirming the golden cross
Traders should wait to see if the trend continues or if the moving averages reverse across each other to avoid potential fake-outs before entering a position. You may be tempted to enter a long trade as soon as you identify a golden cross, but you should confirm this signal with other indicators before taking action.
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