By Nathan Ferguson
Making the trading decision by using statistical analysis is becoming the priority of many technical analysts. In order to perform the analysis of stocks and markets, huge amount of data is used by the technical analysts. The data entered is usually portrayed in the form of different shapes formed on the charts. The experts analyze these charts and deduce results accordingly.
Two important terms used in the crypto market are golden cross and death cross. Both terms refer to entirely opposite concepts. Golden cross is the term used for the bull market moving in upward direction and death cross is the term used for a bear market that exists for long term. When the short-term MA crosses the long-term MA, it portrays long term results for the users.
Here is a detailed article about the difference between the golden cross and death cross in the market dynamics and how they help the traders in making future decisions.
What is Meant by Moving Average?
In order to create a technical analysis of the average prices that are being updated constantly, a stock indicator is commonly used known as moving average (MA). To clearly understand the concepts of golden cross and death cross, one needs to have a sound understanding of the concept of moving average.
Usually, to determine the direction of the trends related with an asset or to know about the resistance levels or support that it is getting in the market, the moving average is calculated.
When the average price of any asset is analyzed for a specific period of time, the technical indicator called as moving average is used. It helps the traders to predict if the market is being bullish means it is moving in the upward direction or the dynamics are moving them to bearish direction that is, it is moving in the downward negative direction.
While trading the cryptocurrency, the moving average helps to provide powerful signals. One can adjust the time period for according to his own choice that may vary between 10 to 200 days. These signals facilitate in highlighting the ongoing trends in the market so that they can be easily identified by the traders.
Types of Moving Averages
There are different types of moving averages that are used by the traders to identify and highlight the market trends. They are used as guidance to buy or sell any asset in the 50 day to 200 day set periods by being watched closely. Moving averages are the lagging indicators that are based on prices in the past. Some of them are mentioned below.
- Simple Moving Average
Simple moving average (SMA) is the type of average where for a certain period of time, the average price of an asset is recorded and then divided over the total number of given periods.
- Weighted Moving Average
In the weighted moving average, certain weight is assigned to the prices of the assets at the present time. Therefore, the changes that may be occurring in the market can be easily reflected by using this average.
- Exponential Moving Average
Exponential moving average refers to the condition where more weight is assigned to the prices of the assets in the market. However, the rate of decrease in the price of the asset and the price that was assigned initially, the exponential moving average is not merely consistent with each other.
What is Meant by Golden Cross?
While technically analyzing the market statistics, when a major long-term MA (moving average) crosses with the short-term MA (moving average), the condition is referred to as a moving cross. It is an indicator of an upward turn and increase in prices in the financial market. The long-term moving average moves comparatively slower than the short-term moving average where such conditions are reached where both of these moving averages cross each other.
If we explain it in terms of simple moving averages, when a simple moving average of 50-day period crosses the simple moving average of 200-day period, that condition is termed as a golden cross. It indicates a definite uprise in the market trends.
Stages of Golden Cross Formation
Each golden cross is different from the other but the stages of formation of each can be observed distinctly. The formation of golden cross normally occurs in three distinct stages mentioned below.
- Stage 1
The beginning of golden cross formation is indicated by the depletion of the selling process. It is the indicator that the downtrend in the market has now come to an end.
The buyers usually control the downtrend going on in the market during the first stage. While recording a 50-day average moving signal, any short-term weakness observed marks the start of golden cross. As soon as the short-term sellers start drying up, the buyers begin to take the control. This results in the increase in the strength of the market that could be observed easily.
- Stage 2
When the long-term MA is crossed by the short one, it indicates the second stage of golden cross formation. The buyers try to gain the control of the market by increasing the prices, this results in the leveling out that could be seen on the chart.
The cross is formed when the increase in the momentum causes the 50-day moving average to cross the 200-day moving average. However, whenever a 50-day moving average crosses the 200-day moving average, there is a high alert given by the traders. This is done to check whether the increase in the trend will occur in real or is it just a false alarm.
- Stage 3
This is the last stage where the prices continue to increase in the upward direction marking an uptrend in the chart. When the momentum continues, the 50-day moving average keeps on increasing and pushing up. In case of short bursts, it may lead to overbuying of assets in the market.
What is Meant by Death Cross?
One can understand as death cross as the complete opposite concept of golden cross. When a crossover of the moving averages occurs in the downward direction, it is marked as a death cross. This is the indicator of the downtrend in the financial market. A death cross is usually the indicator of the start of a bear market.
When the moving average recorder over a 50-day period crosses the moving average recorded in the 200-day period in the downward direction, it marks the downtrend and the start of decrease in prices of the assets.
Stages of Death Cross Formation
Similar to the golden cross, no two death crosses are same, but the formation of each death cross occurs in distinct phases. Death cross is also formed in three stages that are mentioned below.
- Stage 1
The beginning of the death cross formation occurs when the uptrend is still happening, and the short-term moving average still lies above the long-term moving average.
When an asset in the uptrend market, suddenly the moving average being recorded in the 50-day period begins to fall. This is an indicator of weakening of the market trends and the start of a bear market. The prices that were continuously increasing begin to fall suddenly. From the 200-day average, a divergence of the 50-day moving average can be seen.
- Stage 2
In the second stage of the death cross formation, the reversal happens.
When the moving average being recorded for a 50-day period crosses the moving average recorded in 200-day period in the downward direction, this produces a signal that the downtrend may be starting on the market. As the prices continue to fall, the divergence between the two moving averages begin to become more prominent. One can clearly observe the formation of death cross on the chart during this stage.
- Stage 3
In the last stage, as the short-term moving average moves further down, the downward momentum continues to increase causing the increase in the downtrend keeping it stay below the long-term momentum.
The moving average being recorded for a 50-day period continues to move below than the moving average being recorded for a 200-day period. The selling pressure increases in the market among the traders as they think that the prices may continue to fall further leading in the loss for them. Therefore, they usually liquidate their assets in the market before the price declines further.
In some cases, the prices quickly rebound and start moving in the upward direction. This is a momentum created for a short time period and in that case one may consider the death cross as a false signal or bear market trend.
Difference Between a Golden Cross and Death Cross
As mentioned before, golden cross and death cross are entirely opposite concepts. The signals that they produce and their appearance on the chart all are different and opposite. The moving averages not only predicts rather confirms the occurrence of a trend being the lagging indicators. In order to understand the market conditions in a better way, these indicators should be integrated with the other factors changing in the market.
The high trading volume, the convergence or divergence of the moving average and index of relative strength are some of the factors that confirm the formation of golden cross or death cross.
- Signals
The key difference that discriminates between the golden cross and the death cross is the signals that they produce. the golden cross indicates the upward trend in the market and the death cross on other hand indicates downward trend.
- Indicator
When the moving average being recorded for a 50-day period crosses the moving average being recorded for a 200-day period from above it indicates the formation of golden cross. However, when the moving average being recorded for a 50-day period crosses the moving average being recorded for a 200-day period from below it indicates the formation of death cross on the chart.
- Economic Implications
The golden cross indicates the occurrence of the bull market that may persist for long term. This causes the increase in prices and increases the buying pressure. But sometimes, it may be a false signal for the traders that is predicted by keeping in mind the bull runs in the past. Therefore, the golden cross could be a false one and persist for very short period.
On the other hand, death cross indicates the beginning of the bear market that may persist for long term. This concept is not only applicable in crypto markets rather in all stock markets too. in the past years, the death cross has been used to indicate the arrival of the economic crisis many times. The examples include the stock market crash of 1929 termed as Black Monday or the financial crisis of 2008.
Sometimes, the death cross may also be a false indicator and the market recovers soon as after the occurrence of death cross.
- Behavior of Traders
During the occurrence of golden cross, the buyers in the market become active and buying pressure increases. In contrast, when the prices decline in the death cross period, the traders liquidate their assets and cause an increase in the selling pressure in the market.
Reliability of Golden Cross and Death Cross Indicators
In a number of markets, the golden cross and the death cross indicators have proven helpful. These markets may include the cryptocurrency, stocks and forex etc. The basic influences and volatility level vary from market to market.
The moving average is the lagging indicator being used in the market. It predicts the trends according to the past experiences. It means the market has already entered the situation if the golden cross or death cross is observed on the chart.
The indicators that use higher timeframes to calculate the moving average are considered more reliable. This can be understood as the moving average being calculated in the time frame of 1 or 2 hours would not prove much authentic than the moving average calculated in the timeframe of 50 to 200 hours.
Utilization of Golden Cross and Death Cross in the Trading Strategies
During the formation of golden cross, the buying activity increases. Similarly, more selling activity can be observed during the death cross. All traders use different approaches to deal with the golden and death cross situations. Some of them not believe solely on the signals that are observed through moving averages rather wait for the bull or bear market to occur completely before buying or selling their assets.
Some of them also use the other economic indicators available in the market in integration with the moving averages to confirm the trends in the market. Normally, the traders use the golden cross and death cross as to reverse the trends. In case they observe that the golden cross is being formed, the traders hurry in buying the assets before the prices increase in the market as anticipated.
Similarly, if the death cross is being formed, the selling pressure on the traders increase and they end up selling their assets before the decline in prices further as a bear market is indicated.
But it is considered very important to confirm the crosses before following them blindly as the false signals indicated sometimes may lead to a loss for the traders. Therefore, one should consider other technical indicators of the financial market in addition to the moving averages being calculated for a given time period.
The experienced traders can easily predict the ongoing market situation. It might be the situation where the golden cross is formed in the market for a time being but then looking at the bigger picture they get to know that the death cross is on its way in long-term time frame.
Moreover, trading volume is also an important signal to be considered as the spikes formed in the given volume assist the traders to predict the start of the bear or bull market and to validate the predicted signals.
How to Use Golden Cross and Death Cross Indicators?
One needs to follow some easy steps to be able to use the golden cross and death cross indicators.
- Open the account in FOREX.com website or if already a user log into it. It takes a few minutes usually.
- To start the trade instantly, add some funds.
- From the popular market pairs available such as USD/JPY, GBP/USD or EUR/USD, choose the pair of your choice.
- Using the number of trading tools available such as golden cross or death cross, SMART signals or advanced charts, find better opportunities in the market.
Conclusion
Golden cross and death cross both are the part of the technical analysis performed in the financial market. They indicate the beginning of the bull and bear market respectively. The moving average is calculated in order to determine the trend in the market. It facilitates the traders to make the decisions in a better way about their investments and decide when it is the time to enter the market or exit it.