Before diving into what golden cross and death cross patterns are, we need to understand the fundamentals of moving average, better known as MA. On a price chart, the Moving Average (MA) represents the average price at a particular time frame. There are various moving averages corresponding to various time frames. For example, a 50-day moving average will measure the asset’s average price in the last 200 days. You can find numerous articles on Moving averages in our blog section to understand moving averages.
Consequently, what is a golden cross and a death cross, and how can traders leverage these patterns in their trading strategy?
The Golden Cross
Golden Crosses consist of a short-term moving average crossing a long-term moving average. The 50-day moving average is usually selected as the short-term average, whereas 200-day MA is usually selected as the long-term average. However, the golden crossover isn’t limited to using these patterns. Gold crosses can be used on any timeframe, since they imply crosses between short-term averages and long-term averages.
A golden comprises the following phases:
- The short-term moving average is under the long-term moving average in case of a downtrend.
- In case of a pattern reversal, the short-term moving average is above the long-term moving average.
- The short-term moving average holds its position above the long-term moving average in case of an uptrend.
Much of the time, the golden cross is a bullish signal, so traders are aware that the average price of an asset is determined by a moving average. Thus, if a short-term moving average is well below long-term moving average, the short-term market movement is bearish in comparison to the long-term price action.
Assume the short-term moving average crosses over the long-term moving average. This indicates that the short-term average price computes better than the long-term average, signaling a spike in the direction of the trading trend, which is why the golden cross chart pattern is regarded as a bullish indicator.
Conventionally, the golden cross is often established on a 50-day moving average coupled with a 200-day moving average. However, the initial idea is based on the short-term moving average crossing over the long-term moving average.
Interestingly, EMAs, short for Exponential moving averages, can also be used to determine golden crosses. EMAs are suitable for recent price movements; however, the crossover they produce might not be as reliable as EMAs tend to present false signals due to their affinity to recent price movements.
The death cross, in contrast to the Golden Cross, is a chart pattern in which a short moving average passes under a long, moving average. A perfect example is a 50-day average move that goes below the 200-day average. The death cross is a bearish signal and the polar opposite of the Golden Cross.
Golden Cross vs. Death Cross
After understanding both the concepts, finding the differences between them isn’t hard to understand. As mentioned earlier, the golden cross and the death cross are polar opposites to each other. While the golden cross is considered a bullish signal, the death cross is considered a bearish signal.
Similarly, both of these fundamental patterns can be confirmed by high trading volumes. Interestingly, veteran trades often refer to other technical indicators to give more context to the crossovers in either pattern because crossovers tend to indicate trend reversals that might have already happened.
How would you make use of the golden cross and the death cross to your advantage?
The primary idea behind the golden cross and the death cross is fairly simple. Suppose you know how to use MACD, you will be able to comprehend these crossover signals. When speaking about the traditional golden cross and death cross, we often utilize daily charts. Therefore, a straightforward strategy would be to buy at a golden cross and sell at a death cross.
Interestingly, this strategy would’ve been a relatively successful strategy to buy Bitcoins over the last few years. Although there have been instances of false signals along the way; however, blindly following a signal should not be recommended.
When using the golden cross or death cross, you must be open to zooming out and seeing the bigger picture because these crossovers could happen at any time. A golden cross could happen on a weekly time frame. At the same time, the death cross could happen on an hourly basis. Therefore, you must zoom out and focus on the bigger picture.
Despite the abundance of chart patterns, the Golden Cross and Death Cross chart patterns are relatively simple yet powerful tools for traders. Traders can use either pattern to give context to various indicators such as EMAs and MAs. Now that you know about the golden cross and death cross chart patterns, how do you plan on using them?
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