Golden Cross and Death Cross Explained
Introduction
There are many chart patterns that can be found when looking at technical analysis. Nevertheless, there are a variety of other patterns that can be used by day traders, swing traders, and long-term investors. Some of these patterns include the golden cross and the death cross.
it is important to understand what a moving average (MA) before we look at what a golden cross or a death cross is. Basically, it's a line plotted over the graph of the price of an asset that shows the average price over a period of time for that asset. It is well known that a 200-day moving average measures an asset's average price over the past 200 days. There is an article on moving averages available here that will provide you with more information: Moving Averages Explained.
What is a golden cross?
There is a chart pattern known as a golden cross (or golden crossover) that occurs when a short-term moving average crosses over a long-term moving average. A 50-day moving average is commonly used as the short-term average, and a 200-day moving average is commonly used for the long-term average. A golden crossover can be viewed in a number of different ways, however, this is not the only way. There is no particular time frame in which it can occur, but the idea is that a short-term average crosses over a long-term average.
Typically, there are three stages to a golden cross:
1. During a downtrend, the short-term moving average (MA) is below the long-term moving average (MA).
2. It appears that the trend has reversed and that the short-term MA has crossed above the long-term MA.
3. An uptrend begins when the short-term moving average stays above the long-term moving average.
There are many cases in which a golden cross may be viewed as a bullish signal. The moving average is what is being used to determine the price of an asset over a certain period of time. The short-term moving average (MA) is below a long-term moving average in this sense, meaning that the short-term price action is bearish in comparison to the long-term price action.
In the case of the short-term average crossing above the long-term average, what happens then? On average, the short-term price rises at a faster rate than the long-term price rises. In this sense that a golden cross is considered bullish since it indicates a potential shift in the direction of the market trend.
It is conventionally believed that a golden cross occurs when the 50-day moving average crosses above the 200-day moving average. It is important to understand, however, that the general concept behind a golden cross is that a short-term moving average crosses over a long-term moving average. There is a possibility that we could also have golden crosses occuring on other timeframes, including 15-minute, 1-hour, 4-hour, etc.) Higher time frames tend to be more reliable than lower time frame.
we have examined a golden cross in combination with what is called a simple moving average (SMA). A moving average can be calculated using several different ways. For instance, the exponential moving average (EMA) is a popular way to calculate moving averages. This algorithm uses a different formula that emphasizes more recent price action.
Additionally, it is possible to use the EMAs as a means of exploring bullish and bearish crossovers, along with the golden cross. Due to EMAs reacting faster to price changes, crossover signals they produce may be less reliable and may present more false signals as EMAs react more quickly to recent price changes. Nevertheless, EMA crossovers are widely used by traders as a tool to identify trend reversals.
Golden cross vs. death cross - what’s the difference?
Both of these have been discussed, so it is not difficult to understand the differences between them. They are essentially in opposition to each other. A golden cross may be regarded as a bullish signal, whereas a death cross may be considered a bearish signal.
The high trading volumes associated with both of these can serve as confirmations. When looking at the crossover context, some technical analysts may check other technical indicators as well. An example of these indicators is the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI).
In addition to this, it is important to keep in mind that moving averages are lagging indicators and are unable to predict the future. It means that both crossovers will usually cause a strong confirmation of a trend reversal that has already occurred - as opposed to a reversal that is still in progress.
How to trade the golden cross and the death cross
It is quite easy to understand the basic idea behind these patterns. If you understand how traders use the MACD throughout the trading process, you will easily be able to trade these crossover signals. We typically use the daily chart to interpret conventional golden crosses or death crosses. So, the simplest of strategies would be to buy at a golden cross and sell at a death cross. There has been a good deal of conflict between these two strategies in the last few years - despite the fact that there were many false signals along the way. For this reason, following a signal blindly is typically not the best approach. In order to choose the best market analysis technique, you may want to consider other factors.
In the above discussion, the crossover strategy refers to the crossing of daily moving averages. Now, what if we consider other time periods? In the same way that gold crosses and death crosses occur, traders can profit from them, as well.
On the other hand, the signals on the higher time frames are more powerful than the signals on the lower time frames, as is the case with most chart analysis techniques. There may be a golden cross occurring on the weekly time frame, but there might also be a death cross occurring the hourly time frame. It is therefore very helpful to zoom out on the chart and take a look at the larger picture, taking into account multiple readings at the same time.
The volume of trading is also something that many traders will consider when they trade golden crosses and death crosses. The volume can also be a strong confirmation tool, as is the case with other chart patterns. Therefore, some traders may be more confident in the validity of a crossover signal if a volume spike is present in conjunction with the signal.
As soon as a golden cross occurs, the long-term moving average may be considered as a potential support zone. On the other hand, if a death cross occurs, it could be considered as a potential area of resistance.