Golden Cross & Death Cross in Crypto Trading: Explained
Technical analysis, which was largely introduced into traditional financial markets by journalist Charles Dow, uses past market data to forecast the future of a specific asset or the market as a whole. The fundamental theory of technical analysis is that market trends repeat themselves. When an asset follows a trend, there's a good chance it's just repeating a trend it's already followed. Traders who use technical analysis analyze an asset of their choice using special tools known as technical indicators.
Only recently have traders and investors begun to use technical analysis in the cryptocurrency market to determine when to enter the markets for a profitable trade. The terms "golden cross" and "death cross" are both associated with the moving average (MA) technical indicator.
Moving Average (MA)
This technical indicator is essentially a line on a price chart that calculates the average price of a cryptocurrency asset over a given time frame. The most common periods used by traders to calculate moving averages are 15, 20, 30, 50, 100, and 200 days; however, you can choose a time frame for your moving average chart based on your trading strategy and objectives.
Then there's the golden cross and the death cross. They are both crossover signals that occur when two different moving averages intersect in specific ways. What do the terms mean, and how do you apply them when trading cryptocurrency?
A chart pattern referred to as a golden cross occurs when a shorter-term moving average crosses above a longer-term moving average. The 50-day moving average is typically used as the short-term average, and the 200-day moving average is used as the long-term average. This, however, is not the only way to consider a golden crossover. It can occur at any time, and the basic concept is that a short-term average crosses over a long-term average.
A golden cross is typically formed in 3 stages:
- During a downtrend, the short term moving average is below the long-term moving average.
- The trend reverses, and the short-term moving average crosses above the long-term moving average.
- An uptrend begins when the short-term moving average remains above the long-term moving average.
A golden cross is defined as the 50-day moving average crossing above the 200-day moving average. The general idea behind the golden cross, on the other hand, is that a short-term moving average crosses over a long-term moving average. In this sense, golden crosses could occur on other time frames as well (15-minute, 1-hour, 4-hour, etc.). Nonetheless, higher time frame signals are more reliable than lower time frame signals.
A death cross is the polar opposite of a golden cross. It's a chart pattern that occurs when a short-term moving average crosses below a long-term moving average. The 50-day moving average, for example, crosses below the 200-day moving average. As a result, a death cross is often interpreted as a bearish signal.
A death cross is typically formed in 3 stages:
- During an uptrend, the short term moving average is higher than the long term moving average.
- The trend reverses, and the short-term moving average crosses below the long-term moving average.
- When the short term moving average falls below the long term moving average, a downtrend begins.
In the past, the death cross correctly predicted a bearish signal prior to significant economic downturns in history, such as those in 1929, 1938, 1974, and 2008. On the other hand, the death cross has been known to send out false signals, as it did in 2016.
Difference between Golden Cross and Death Cross
As you may have guessed by now, a golden cross and a death cross are diametrically opposed. A golden cross indicates an impending long-term bull market, whereas a death cross indicates an impending long-term bear market.
However, a golden cross and a death cross are considered far more significant when a large trading volume follows them. If the crossover is a golden cross, the longer-term moving average is regarded as a significant support level for the market in the near future.
Similarly, if it is a death cross, the longer-term moving average is regarded as a level of resistance.
In the aftermath of Bitcoin's 2021 crash, there has been a lot of interest in the death cross and golden cross. As a crypto trader, you should keep in mind that moving averages are lagging indicators and thus have no predictive power. So, whether it's a golden cross or a death cross, they're only a strong confirmation of a trend reversal that's already happened, not one that's still happening.
To summarize, A golden cross occurs when a short-term MA crosses above a long term MA. A death cross occurs when a short term MA crosses below a long term MA. They can both be used as reliable tools for confirming long-term trend reversals in the stock market, forex, or cryptocurrency.
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