For quite a number of people, trading cryptocurrency involves buying and holding a particular coin with the hope that its value will increase over time. However, for some traders and investors, trading crypto involves market analysis, studying price charts, and observing reliable technical analysis patterns. Out of this, the death cross and the golden cross have emerged as the two major technical analysis patterns. Although these concepts may sound scary and amiable at the same time, they go far beyond such catchy words.
Among the key concepts in technical analysis is that of moving average. It is from this concept that death cross and golden cross patterns emerge. A death cross occurs if a short-term moving average moves below the long-term one and such may be a signal of a market shift toward a bearish trend. Alternatively, the golden cross takes place once the short-term moving average moves above the long-term moving average signaling a potential bullish market.
This article is devoted to a detailed analysis of the complexity of these patterns pointing out how they function and their influence within the crypto space. But first, let us understand the moving average which sets out the entire foundation upon which these patterns operate.
Understanding Moving Averages (MA)
A moving average(MA) is a technical analysis indicator employed by traders to filter out price information and monitor its trend within the market. These indicators show price movement direction during a specific period, thus allowing traders to make informed decisions.
A moving average is depicted in a chart as a line that represents an average price that is being calculated in real-time. This specific time frame varies depending on the trader’s choice. For example, it can be a period of 5 minutes, 10 days, 1 month, or any other period.
There are various moving averages, varying on how they are calculated, but offering traders important data points they can utilize in their trading strategies. However, the two main types of moving averages are- the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
The Simple Moving Average (SMA)
The Simple Moving Average(SMA) studies the average value of the asset with respect to recent price history. The average price is calculated by taking into account the prices of the recent ones and then dividing it within a specified number of the average period. This provides an average price that may be used to smoothen the pricing data and show a trend. An upward SMA indicates a market uptrend while a downward SMA indicates a possible market downtrend.
The formula to calculate SMA is:
The Exponential Moving Average (EMA)
Exponential moving averages give higher weights to the latest prices and therefore are more adaptable to current market trends. It is mostly utilized by day traders who wish to execute trades at a quicker pace. The EMA is usually a moving average and for its calculation, the last data is given a huge consideration. This thus gives it the ability to reflect price fluctuations faster.
To calculate EMA the SMA over a particular period is calculated first. After this, calculate the multiplier for weighting the EMA, known as the “smoothing factor,” which typically follows the formula: [2/(selected time period + 1)]. For example, for a 10-day moving average, the multiplier would be [2/(10+1)]= 0.1818. To arrive at the current value the smoothing factor is combined with the previous EMA. This thus makes the EMA give a higher weighting to recent prices, while the SMA assigns an equal weighting to all values.
The formula to calculate EMA is:
Moving averages play an important role in volatile markets like in the case of cryptocurrencies, where price changes can be immense and sudden. By generating trading signals they are able to give traders insights on the market dynamics enabling them to make wise investment choices.
What Is a Golden Cross in Crypto Trading?
A golden cross is a pattern that occurs when a short-term moving average crosses above a long-term moving average. The common moving averages utilized in this pattern are the 50-day average(representing the short-term MA) and the 200-day moving average(representing the long-term MA).
A golden cross is commonly formed in a three-stage process:
A Downtrend
During this period the short-term MA is below the long-term MA, with sellers dominating the entire market signaling a bearish market sentiment.
During A Crossover
As the market begins to reverse, the short-term MA begins to rise at a higher pace and eventually it crosses above the long-term MA. This crossover represents the actual golden pattern and a market reversal.
An Uptrend
After the short-term MA has eventually crossed above the long-term MA and maintained its position a golden cross is formed. During this period buyers dominate the market and a bullish market sentiment is signaled.
How Does a Golden Cross Work?
As elaborated above, a golden cross utilizes the short-term MA and the long-term MA. This pattern works by comparing these two moving averages, where the short-term MA moves faster and is more sensitive to market prices as compared to the long-term MA. When the short-term MA moves above the long-term MA it indicates momentum in the market price moving upwards. This alerts traders to enter the market as buyers with a long-term holding position.
It is important to note that the longer the averages used when stalking a golden cross, the more reliable it will be in terms of predicting an upward price action.
What is a Death Cross in Crypto Trading?
A death cross is the opposite of the golden cross and it represents a downward moving average crossover. This means that a death cross occurs when the short-term MA moves below the long-term MA. The same moving averages used in the golden cross are also utilized to predict this pattern, that is: the 50-day average(representing the short-term MA) and the 200-day moving average(representing the long-term MA).
The death cross pattern is marked by three phases:
During an uptrend
This phase is characterized by the short-term MA moving up above the long-term MA, a period during which buyers are dominating the market.
A Reversal
This is the phase where the market reverses and the short-term MA crosses below the long-term MA. This marks the actual death cross indicating a market reversal moving downwards.
A Downtrend
After the occurrence of a death cross, the short-term MA continues to move below the long-term MA. This phase is characterized by the dominance of sellers forcing a bearish market sentiment.
How Does a Death Cross Work?
The death cross works the same way as the golden cross but in the reversal of market sentiment that is- a downward market trend. When the short-term MA crosses below the long-term MA it indicates that the price is losing its momentum signaling a selling pressure. Here traders liquidate their long-term holding positions or enter short positions in apprehension of a continued price fall.
Advantages of Death Cross and Golden Cross
As technical analysis patterns, golden and death crosses come with a wide range of benefits to crypto traders. These include:
Simplicity in Constructing
Unlike other criteria in analyzing market trends, moving averages are easy to construct. Given that moving averages are the key foundations upon which death and the golden cross lay, constructing and identifying them also becomes simple. Additionally, some trading platforms offer inbuilt trading metrics like moving averages, thus allowing traders to easily navigate the market.
Applicable with Other Indicators
In most cases traders often utilize the death cross and golden cross, to predict market trends in conjunction with other market indicators. This offers an enhanced reliability of these patterns, giving traders a solid signal to rely on.
Suitable for Automated Trading
Death cross and golden cross patterns depend upon the history of the market price. This makes them perfect for automated trading where traders can set up trading bots to monitor the trade.
The trader can set the bot to execute a buy whenever a golden cross is detected and sell whenever a death cross is detected. This offloads the traders the burden of constantly checking market trends to monitor their assets.
They Are Suitable for Both Longer-Term and Shorter-Term Trading
Death crosses and golden crosses cut across small day traders and long-term investors seeking to invest in crypto trading. They offer long-term market analysis signaling potential market shifts in coming weeks, months, or even years. This information allows long-term investors to make informed decisions before entering the market.
They Are Tested and Applied in Other Markets
Golden crosses and death crosses are widely used in stock markets and forex trading. This gives crypto traders a measure of confidence when using them to analyze trends before entering the market.
Disadvantages of Golden Crosses And Death Crosses
Although golden crosses and death crosses are key patterns in market analysis, they have their own limitations. These include:
They Are Lagging Indicators
Golden crosses and death crosses rely on old price actions. As a result, when a crossover happens most of the movements in terms of prices would be complete. The reliance of traders on these crossovers alone may lead them to ignore early signs of a trend reversal which may cause them huge losses.
False Signals
Crossovers between short-term MAs and long-term MAs also tend to give false signals of a golden or death cross, especially in rough or sideways markets. Such a crossover will probably convince traders to act, but it can change very fast leading to losses.
They Are Prone to Whipsaws
Whipsaws refer to scenarios where after a crossover, an asset’s price moves in one direction and reverses it immediately. The result may be that traders get trapped in these whipsaw movements and either lose out or miss out on such opportunities.
Sensitivity to Timeframes
The reliability of golden crosses and death crosses depends on the respective short-term and long-term moving averages. This can lead to different signals in different time frames thereby making it hard to establish a highly reliable structure.
Lack of Context
Crossovers indicating a golden or a death cross may not provide sufficient context to make trading decisions on their own. For traders to have a comprehensive outlook on the state of markets; they need to factor in trading volumes, market sentiments, and wide economic indicators.
Golden Cross vs. Death Cross: Differences and Trading Strategies
Both the golden cross and the death cross are key technical indicators traders and investors use to analyze potential market shifts. Although they are based on the same principle of moving averages, they act as opposing indicators and are used differently in trading strategies.
First let us see the key differences between these two market indicators:
| Golden Cross | Death Cross | |
| Effects on price movement | An uptrend in price action | A downtrend in price action |
| Market Implication | A possible long-term bullish market is upcoming | A possible long-term bear market is upcoming |
| Indicator | The short-term moving average(50-day MA) crosses above the long-term moving average(200-day MA) | The short-term moving average(50-day MA) crosses below the long-term moving average(200-day MA) |
| Trader’s behavior | Buying | Selling |
| Moving average(MA) effect | The long-term moving average becomes support | The long-term moving average becomes resistance |
For traders death cross and golden cross offer them different trading strategies. Traders often utilize the golden cross as a signal to enter a long market position, with the hope of a price increase. On the other end traders frequently view the death cross as a signal to enter a short position, with an anticipation of a future price decrease.
What to Watch Out For When Using Golden Crosses And Death Crosses
Whenever you intend to use golden and death crosses as your trading indicators it is important for you to be more careful with certain things. To be on the safe side it is best for you to observe the following:
Crowded Trades
Whenever most people start using the same trading signal when trading, this signal becomes less effective in predicting market trends. Therefore it is wise for you to always integrate other market analysis strategies with death and golden cross indicators for you to be on the safe side.
Timeframe
The golden cross and death cross operate on the chosen timeframe by the trader. Therefore it is important for you as a trader to watch out for the best timeframes for the short-term and long-term moving averages. Experimenting with different timeframes over time can give you a perfect time frame to utilize hence yielding you fruitful profits.
Risk management strategies
Whenever you are using the golden and death cross as indicators for your trade it is always advisable for you to implement strategies that will mitigate loss in case of a false signal. One way to do this is to set stop loss orders which will execute themselves whenever a loss set limit is reached.
Lagging Indicators
As discussed earlier, the death cross and golden cross can be termed as ‘lagging indicators’. This means they rely on past price actions. However, even if the past price actions worked well for this signal it is not a guarantee they will work again the same way. Therefore it is important for you to do a comprehensive market analysis rather than depending on past price actions.
Other Trading Signals
As a trader it is advisable to integrate other trading signals while using cross signals. This guarantees trade success as it includes the golden cross and death cross as additional indicators to give you full confidence to enter the market. One major trading signal often used in affiliation with golden crosses and death crosses is trading volume.
Do your own research (DYOR)
Before entering the market it is always advisable to do your own research on the market volatility, volume, and reliability of your signal. This will equip you with sufficient information allowing you to make informed market decisions and possibly minimize risk occurrence.
Are Golden and Death Crosses Reliable?
For most traders and investors golden and death crosses are reliable indicators to assess whether a market is in a bullish or bearish position. However, in two notable instances, these indicators gave a wrong market momentum signal. The first one was at the beginning of 2020 during the pandemic breakout and an irregular Bitcoin peak as opposed to historical price patterns.
Bitcoin Death Cross. Credit: Trading View via CCN
This thus implies that the reliability of the golden cross and death cross to offer correct trading signals is not sincerely upon themselves as indicators to execute. It takes a trader more than just observing these trends to do a broad market analysis, integrate more trading signals, and above all do your own market research.
Conclusion
The golden cross and death cross are essential tools for any trader navigating the crypto market. With their ability to predict market trends they offer useful signals to traders allowing them to make informed decisions while trading. Whether you are a long-term holder or a day trader these cross signals offer you the best buying and selling strategies. Thus integrating and using them with other strategies will give you an additional assurance to navigate through the ever volatile crypto market.
