Golden Cross and Death Cross Explained
Crypto trading patterns can tell you a lot: what an asset is going through at some point, or where the price would go. These are the fundamental elements of technical analysis, which we discussed in our earlier article (discover more here). Today we're talking about the golden cross and the death cross. What are they and how can they be helpful in trading, you'll find out in a moment!
If all these terms are so much Greek to you, fear not. We're here to catch you up. The golden cross is when a short-term moving average rises above a long-term moving average. As a rule of thumb, the 1st one is a 50-day EMA, the 2nd - a 200-day EMA. The pattern serves as a buy signal.
The death cross happens when a shorter rolling average crosses over a major long-term rolling average to the downside.
How They Differ?
In view of the above, no prizes for guessing that these figures are polar opposites. The first combination means that the long-term uptrend goes on, i.e. it can be attributed to bullish signals. The second one is a signal for the continuation of a long-term downward trend, therefore, it is a bearish phenomenon (learn more about crypto trends here).
Why Do We Need these Crossovers During Trading?
- as history has demonstrated, the death cross is the messenger of large economic crises;
- the golden cross, in turn, is a high-quality filter that helps you quickly determine the current market situation. If crypto lovers trade only in the direction of the trend, they will be able to increase the percentage of profitable trades;
- when the price is between the 50 and 200-day EMAs, it fluctuates in the range that is limited by these values. This is a great opportunity for short-term swing trading;
- with a daily chart, crypto fans can turn to the simplest plan: buy at a golden cross and sell at a death one;
- two pretty rare, but still very strong signals are useful when confirming long-term trend changes;
- at the golden cross, the short-term EMA could be seen as a potential area of support. When it comes to the death cross - a zone of resistance. We remind you that these levels are important factors. They determine the time when the power of supply and demand meet.
Kindly note that real professionals do not focus on just one indicator. Pay attention to the volume of trade. It can become the actual confirmation of the signal.
We should not forget that signals on larger time frames have greater reliability. The situation when W1 shows the golden cross and H1 shows the death one is not at all uncommon. Here's a tip: zoom out the chart, then you will have a more complete picture.
Finally, perfect patterns don’t exist. Sometimes the death cross can generate wrong signals. The most striking example is the signal for the SPX downtrend in 2016. So stay alert!
We hope that this article will be useful for you.