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Golden Cross And Death Cross Explained

BitForex Editor
Jan 22, 2021

Introduction

Technical analysis is a complicated but efficient tool in the trading ecosystem, its utilization of statistical analysis has made it a mainstay in the market helping traders to project and anticipate movements in stock and market.

T.A makes use of tools like charts and graphs to make its analysis and projections, this helps traders to recognize common patterns and trends that occur in the ever-evolving market. These trends and patterns often occur in funny shapes and forms, possessing unusual names like head and shoulders & cup with handle, if used appropriately, this technique of market analysis can be very useful.

Gold and death cross are polar opposite indicators of a potential trend change and confirmation of a trend presently mutating. To understand all of this, we need to go into detail about what these crosses are and how they function, read further to get the gist of it all.

What is Golden Cross?

The golden cross is a formation on the market charts that occurs when a short-term moving average makes a cross over a major long-term moving average in an upward direction. This is interpreted by traders and analysts as a signal indicating a definitive upward turn in the market momentum.

In simple terms, the golden cross is a bullish technical formation that supports upward momentum in a currently occurring trend or a potential turnaround in a market on a downward trend. The golden cross formation usually originates from different signal lines from a cross of moving average lines or specific technical oscillators like MACD(moving average convergence divergence) oscillators and Slow Stochastics.

Making use of the golden cross simply involves either identifying the 'shorter-term' moving average or the signal line rising above the longer-term component. With time, the shorter-term component will gradually and organically rise above the average prices as short-term prices move higher, this results in trend momentumbuilding up leading to even higher prices being supported in the near term.

Stages Of The Golden Cross Pattern Formation

Stage 1: As the stock market's downtrend ends, the short-term 50-day moving average goes lower than the 200-day moving average

Stage 2: When a stock recovers during a crossover, the STMA moves across the LTMA, the golden cross formation originates from this intersection.

Stage 3: The short-term moving average moves upward in the final stage, proving that the market is on a bullish trend.

How To Utilize A Golden Cross

Strategy 1: Searching for setups after a long downward trend

This tactic involves studying the market and tracking stocks with a long sustainable downtrend looking for a stock about to go in an upward trajectory. This cross usually happens in a multi-year period before entering a 'basing' period where it could either lean to the bearish or bullish side of the market. Any stock which breaks to the upside is then seen as a winner leading to investing with a belief that profits will be made.

Strategy 2: A combination of double pattern bottom with Golden cross

This is the most simplistic of all other strategies, it involves only three steps, namely;

1. Firstly, Look for a double bottom on the chart which contains two lows with the first higher than the second.

2. The next step involves simply waiting for the golden cross formation to formulate

3. Finally, wait for the price to retest a 200 simple moving average which should be bought with a stop below the low of the double bottom.

When is it Useful?

The golden cross is beneficial to traders who usually end up undecided between trading long or short because the golden cross acts as a trend filter helping to ensure that all your trades are made on the right side of the market.

What is Death Cross?

The death cross is the converse version of the golden cross as it involves a downward moving average crossover. The death cross is caused by the downside trending STMA crossing the long term average, it is often used to determine a downturn in the market.

This technical chart pattern is used to indicate the potential of a major sell-off, it has been used in the past century as a reliable predictive tool for the most bearish markets including; 1929, 1938, 1974, and 2008 where losses peaked at an astonishing 90%. Thus, in a nutshell, the death cross chart pattern indicates the transition from a bull market to a bear market.

Stages Of The Death Cross Pattern Formation

Three phases occur before the formation of a death cross pattern is complete. These include;

Stage 1: This phase involves the continuous uptrend of security which reaches its peak as buying momentum gradually slows down. As it slowly becomes a seller's market, the prices start to fall.

Stage 2: In the second stage, the security's value declines to a point where the 50-day moving average falls below the 200-day moving average, leading to the emergence of the death cross pattern.

Stage 3: The final phase involves the continual decline of the stock's value n the market. If this downward movement sustains momentum, it is regarded as a genuine death cross, but if the downward trend is short-lived, the death cross is classified as a false signal.

How To Determine A Death Cross'S Stability

The death cross pattern is more dependable to the market traders and analysts when its signal is corroborated by other technical indicators like a trading volume. This bearish cross pattern is referred to as a reliable signal if it occurs alongside high trading volumes. Another momentum indicator used in conjunction with the death cross pattern to confirm a downward trend is the MACD.

When is it Useful?

The death cross is a long term indicator that is more revered than other short-term chart patterns by traders and analysts alike as a useful tool to help lock-in gains before a new bear market trend inevitably emerges.

Conclusion

There is still an ongoing debate going on about the reliability of these patterns, which may explain the reluctance by most of the trading world to utilize them. But several testimonies from traders who have endeavored to make use of them have been widely positive, stating that if used moderately and in certain situations, Death cross and Golden cross patterns can be very handy. Always remember to maintain an appropriate risk-reward ratio and work on your timing.

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