Death Cross Vs. Golden Cross – Key Differences
Utilization of statistics-based analytical techniques for deciding trade routes is described as the main highlight surrounding technical analysis. In technical analysis, large amounts of data, normally being conveyed through charts, is both required and utilized to take a better look at stocks and markets. Considering different situations, the lines that describe the chart shapeshift in a lot of unique ways, sometimes also given humorous titles such as “triple peek”, “container with holder” and others.
Trading focused individuals can gain a lot by memorizing such type of commonly occurring designs, while also enlightening them towards upcoming trends and operational statistics with regards to a certain stock.
It is important for traders to make the best decisions and utilize an effective trade strategy. Alongside that, understanding and utilizing utilities like the golden cross and the death cross, specifically mentioned here, can also help traders to understand the market in a much better way, so that they can get the most out of the precious investment they have put into assets during a strategic time.
Now that we have understood the importance of technical analysis, the next section will describe the functionality and importance of moving average (MA) in the financial space.
About Moving Average (MA)
In short, moving average (MA) highlights a stock that is a subject to technical analysis, which then assists in the development of a continuously refreshed average valuation. It is quite important have a tight grip on the concept of moving average, as it will help to gain a much broader view towards our main topics of concern, golden cross and death cross.
In normal circumstances, figuring out a moving average leads to the discovery of the trending pattern that is associated with a holding or to find out both the support and the resistance levels. Moving average can be called as a technical highlighter that defines the average valuation associated with a certain asset regarding a limited time frame.
Moving averages highlight if a given asset is shifting towards a steeper climb or experiencing a significant fall when it comes to the average price valuation. Moving averages are quite resourceful, especially when it comes to cryptocurrency-based charts, as they are often said to provide fresh data all the time.
The good thing about a moving average is that it is customizable, meaning that different time frames ranging from 10 days to 200 days can be set accordingly. These time frames are useful in determining market direction, which also leads them to be recognizable.
There are various forms of moving averages. Let’s look at a few. Primarily comes the simple moving average (SMA). This type is calculated by adding up the average valuation of an asset during a set time frame and then dividing it by the addition of the combined number of time frames.
Secondly comes the weighted moving average (WMA). Taking the terminology into consideration, a higher distribution of weight is provided to the latest price valuations. What this does is that it provides a much clearer idea about the latest fluctuations in valuation.
And lastly comes the exponential moving average (EMA), which has a similar concept to the previous weighted moving average concept, however what differentiates it from the others is that the exponential moving average is not in line alongside the level of drop that occurs between an active valuation and a valuation from the past.
A moving average can also be considered as a “lagging highlighter”, that depends upon the valuation records from the past. Traders must often utilize moving averages, allocating them the name of “signals” that provide them a pathway towards the trade of assets. Cryptocurrency traders must have a good focus on the time frames, especially the ones that fall between day 50 and day 200.
Having a strong grasp over moving averages means that we can now move towards understanding the concepts behind the Golden Cross and the Death Cross.
Defining the Golden Cross
Golden Cross usually refers to an event that happens during the crossing over between a moving average having a small-time frame versus a moving average experiencing a large time frame. In basic terminology, a Golden cross highlight an increase in valuation and positive trend associated with the market.
This means that the moving average with the short time frame increases its trend peek at a much quicker rate, however there are some market statuses that urge the both the small and the large time frame moving averages to intersect. Taking simple moving averages into consideration, the golden cross happens during the intersection of the SMA that lasts 50 days and an SMA that lasts 20 days, clearly highlighting an impressive positive steep trend.
The development of a golden cross usually involves three levels. The first level is when the selling has shrunken, which means that the negative trend is about to conclude and the golden cross is about to hit. The second level involves the intersection of a short moving average and a long moving average. And lastly the final level is acknowledged by the development of a positive trend and a significant rise in valuation.
The thing to note is that if two or more golden crosses occur, it does not mean that their statistical data is fully equal, but the three levels mentioned in the previous paragraph clearly describe the coming of a golden cross, so it is important that we understand each level with slightly more emphasis, so let’s go through each of those levels once more.
At the initial level, the ones purchasing, are all over the dropping trend. Some fragility lasting briefly during the 50-day moving average indicates that a golden cross is about to occur, as the power gained normally comes from buyers coming all over when the short time frame sellers become uninteresting.
Then comes the second level, in which the buyers procced to push the valuations to greater numbers on their efforts to obtain power. This leads to the 50-day moving average being tossed over the 200-day moving average, leading to a massive intersection between the two. If this happens, traders start to think if positive trend has been born is it is just a hoax.
And lastly, during the final level the 50-day moving average maintains its force, highlighting a sort of thrust gained. Overbuying can also happen; however, it only happens in limited few time frames. Additionally, day traders are mostly interested in shorter time frames, for example 5-10 minutes, and the swing traders are more interested in the larger time frames that lasts multiple hours, mainly 5-10 hours.
Defining the Death Cross
In comparison to the golden cross, the death cross leads to a moving average cross that has a downward trend. This helps to identify a proper drop in market which happens during the short moving average drops and then crosses the long moving average. A death cross is basically the conflicting twin to the golden cross.
There are also three levels associated with the death cross. Initially, an ongoing positive trend is being experienced, as the short moving average is ahead of the long moving average. Then comes the reversal level, in which the short moving average intersects down the long moving average. This leads to the start of a drop in trend, because the short moving average drops more, keeping its position lower than the long moving average.
Like the golden cross, two death crosses are not the same, however there are certain highlighters that point out the existence of death crosses. Just like before, we must dive a bit deeper into the three levels surrounding death crosses. The initial levels involve an asset that has a growing trend, however that changes when the 50-day moving average losses its grip and starts to dip, leading to a potential bearish situation.
With the valuations starting to drop, the short moving average begins to drift away from the long moving average. With the first level all set, the second level experiences the 50-day moving average to drop way down the 200-day moving average.
This kind of behavior means that there is an indication that shows that an asset might be moving towards a dropping trend. With the valuations falling rapidly, the difference of the 50-day moving average and the 200-day moving average becomes more noticeable, marking the true development of a death cross.
Then comes the last stage which is basically a nail in the coffin. As the 50-day moving average keeps below the 200-day moving average. This notifies that a drop in trend is indeed true and is imminent. More selling provocation is fueled by the death cross, while traders close on their points because of the indication of further price valuation drops.
But the thing to note here is that if this drop in trend does not maintain itself, then it means this this drop in trend had a short life and the price valuations still start to rise yet again, marking the death cross as an incorrect judgement.
There are tons of investors that buy certain assets when they drop in valuation, however they only do that when they think that the valuation will somehow recover in the coming time, according to the study they have performed. It is important to know that there can be multiple causes for an asset to experience a drop in valuation, because a fragile asset might not be the only cause as the issue of a fragile environment can also be considered.
If that environment manages to recover itself back, surely the price valuation will also recover and then you will surely get a return towards the investment you performed.
Differentiating between the two
The main differentiating factor that separates the two crosses is that the golden cross indicates a positive trend, while the death cross indicates a negative trend. Clearly stated above, the golden cross is like a conflicting twin of the death cross, not only in their nature, but also how they function.
Because moving averages are considered to be “lagging highlighters”, the two of the crosses are only there to make sure that a market trend reversal as occurred and when it will happen again in the coming times. Considering all this, the crosses are useful when they work with technical highlighters so that they can have a much bolder idea about the state of the market.
The occurrence of either a golden cross or a death cross is also sometimes determined through a massive number of trading volume. Other different technical highlighters that can be useful to some analytical experts are the moving average convergence divergence including the relative strength index (RSI).
The initiation of a potentially long bearish market in both cryptocurrency and traditional stock markets is a common sign to a death cross. Looking back in time, the death cross has managed to highlight the coming of an economic crash, specially during the 1929 Black Monday financial crisis that involved falling stocks.
However, all hope is not lost because a death signal has a chance of highlighting a fake signal and that are noted intended to be completely accurate. For example, there have been many times that a market manages to recover after going to a death cross.
As for golden crosses, they indicate an upcoming bullish market which can last a long time, however the type set of features does not mean that the golden cross is 100% proof of any fake indicators.
Utilization of the two crosses in trade
The normal behavior in the market is that the buyers are interested when there is golden cross, and the sellers are all over then there is a death cross. Various types of traders possess traits that can help them access crossover indicators. Just to keep safe, a trader can also wait for a confirmed golden or death cross before they can allocate their resources.
The most common use for both the death and the golden cross is utilizing them to indicate upcoming changes to the trend. If any trader manages to spot an upcoming golden cross, they will start to purchase a certain asset thinking that the price will hopefully recover back and gain more features and additions which were previously unavailable to them. Fake signals are quite often, so it is vital that the signals are confirmed and are line with the technical highlighters.
Because of their impressive set of trading skills, experienced traders can see a much broader and clearer image, while also taking advantage of different readings through different scenario. Taking an example, a golden cross is expected to occur in about an hour to keep everything in check, but raising that field of view, a much more expanded view can be seen in which we can see that in truth, a death cross is the real one backing the whole situation.
If a golden cross occurs, the long moving average might be investigated as potential venue that carries support, meanwhile If a death cross occurs, that same long moving average could be seen as a potential venue that carries resistance. Crossover indications are also able to be confirmed by matching them with signals coming from different technical signs in order to search for the concept of confluence, which is a way of having trade indications be better in terms of reliability.
Trading volume must also be taken into consideration when performing traders based on cross signaling, because the sharp ups and downs in the volume will either assure or reject the validation levels of the signal.
In traditional manner, the easiest strategy to follow is to purchase during a golden cross and then selling during a death cross. This kind of approach could have had a strong influence over Bitcoin trade for the past years, despite there being multiple fake indications. What is not advised is approaching an indication without looking into it. As a counter, the advised approach is to utilize other market analyzing methodologies to make better and effective overall decisions.
Final Thoughts
Both golden and death cross utilized in the world of trading provide a sort of technical analytical-based view. A bullish market is indicated by a golden cross, while a bearish market is indicated by a death cross. The occurrence of both crosses is confirmed by the difference between the short moving average and the long moving average. If the short moving average maintains its position above the long moving average, then it highlights a golden cross and vice versa.
The golden cross and the death cross assist traders in coming up with better ideas for investment, especially when deciding if they want to participate in a trade or leave out a trade. Such type of utilities is vital for traders, so that they can have the maximum output of their investment and gain the best they can from their trading strategies. Although the crosses might be different from each other, but they are fulfilling needs of all kinds of traders around the world that are looking for benefits.
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