Disclaimer: This post is not meant to serve as financial advice. It is only meant for information and educational purposes. Nullbeans.com, its owners and writers are not financial advisers and are not responsible for any financial decisions or actions you or others perform due to information in this post.
In this post, we will discuss what golden crosses and death crosses in trading are, what do these trading signals represent and how to incorporate them in your trading strategy.
Before you read this article, I highly recommend that you check out our article about simple moving averages here, as it is very important for understanding this tutorial.
What is a Golden cross?
In trading, a golden cross is a market signal that occurs when the 50 day simple moving average (SMA) crosses the 200 day SMA to the upside. After the golden cross forms, the 50 day MA will stay above the 200 day MA. The indicator is called “Golden” as it indicates that the market is in a bull market and that it will continue to trend higher.
Take for example the following chart.
In the example above, a golden cross was formed around the beginning of 2019 for the price of gold. The market proceeded to move higher and higher for months after that.
The signal is considered confirmation of an upward trending market as the cross means that the current prices have been trending and staying higher than the longer term 200 day average.
What is a Death Cross?
In trading, a death cross is a market signal which appears when the 50 day moving average crosses down the 200 day moving average. The 50 day moving average then stays below the 200 day moving average. The signal usually indicates that an asset is in a bear market and that the market prices will continue to trend much lower.
A death cross is the exact opposite of a golden cross. Traders usually observe a death cross with caution as it may indicate that prices will fall much lower than current levels.
Take for example the following chart.
In the chart above, the 50 day moving average crosses the 200 day moving average and stays below it. As you can see, the prices moved a lot lower after the death cross has formed on the chart as Gold had entered a downward bear trend.
How to use crosses in trading
It is very important to note that not all crosses are created equal. Just because a death cross happened, does not mean that prices will necessarily will go lower. In this section we will discuss some important points to keep in mind when using crosses in your trading strategy.
Beware of fake crosses
You might see on some charts that a death cross happens, but prices move higher. Take for example the following chart.
As you can see, right after the death cross occurred, the price went up. You might ask why?. Well, in this case, the death cross is a false signal. This is because the 200 day MA is still pointing upwards, indicating that the overall trend is still to the upside.
Take the following chart as another example.
In the chart above, a golden cross forms in the chart. However, price continued to decline. Here. the golden cross here cannot be used as a reliable signal as the 200 day SMA is pointing downward, indicating that we are still in a long term downward trend.
When trading with crosses, you need to make sure that the moving averages are pointing upwards for golden crosses and downwards for death crosses in order to reliably tell that the market has shifted direction.
Another way to use “fake” crosses is to wait till the moving averages confirm the death/golden cross before making any decisions. This means that you can wait till the moving averages are pointing in the correct directions before taking them for granted.
Crosses are lagging signals
Because death crosses and golden crosses are based on moving averages, which are lagging indicators, the death cross and golden cross signals are lagging signals.
This means that if you observe a golden cross, then there is a high chance that the trend has already shifted to the upside and a price bottom is probably in. On the other hand, if you observe a death cross, then it probably means that prices will move lower from now on and that the price has already been trending down for a while.
As you can see from the chart above, the cross happens after the prices have changed trends and not before.
So the take a way from this is to use the crosses as confirmations for trend changes. For example, if you are analyzing a chart and you suspect a future uptrend and you find a golden cross, then the probability that your analysis is correct goes up (and for the death cross vice versa).
Wait for the price to confirm the trend
Another thing that you can do to improve your probability of success is to wait till the price confirms your theory.
For example, if you see a golden cross, but the 50 day moving average is acting as resistance, then it might be better to wait till the prices break that resistance and stay above it before making a moving into the market.
As you can see in the chart above, even though a golden cross formed, the prices later went below the 50 day MA. If you were looking to enter the market in April for example, and you see that the price was below the 50 day MA, then it would be wise to wait until this resistance is broken and not enter the market just because you see a previous golden cross.
If you are not still convinced that waiting is a good idea, then take a look at the following chart.
As you can see, the chart contains a log of golden and death crosses. Here, the crosses are not reliable as we neither have price confirmation nor proper and clear directions from the moving averages. In such cases, it is might be a good idea to consult with another technical indicator.
Use golden/death crosses as long term signals
Finally, it is important to note that crosses, like other signals, are more significant on longer timeframe charts. For example, a death cross on the hourly chart is not nearly as significant as a death cross on the daily chart.
Also, if you try to plot the 50 and 200 moving averages on hourly charts, you will see a lot of noise and crosses. Therefore, it might be a good idea to use golden and death crosses to confirm long term trends and not for quick short term moves.
In this post, we discussed what a golden cross and a death cross is, what the signals mean and how to use them in trading. If you liked this post, them please make sure to check out our other posts below, and to subscribe to our twitter feed! Thank you 🙂
Further reading: The best non-technical indicators to use when trading.