Golden Cross and Death Cross Explained

In this article, we define golden cross and death cross technical chart patterns and consider the best ways to incorporate them into your trading strategy.

Golden Cross vs. Death Cross: Introduction

Golden cross and death cross are two of the most well-known and easy-to-spot chart patterns in technical analysis. Both long-term and swing traders can use golden and death crosses to identify trends and potential entry and exit points for trades.

While a golden cross predicts a long-term bull market for an asset going forward, a death cross suggests a long-term bear trend.

Both golden and death crosses result from an asset’s short-term moving average (MA) crossing over a long-term moving average. Before we go into more detail about golden and death crosses, let's remember what a moving average is.

What is the Simple Moving Average (SMA)?

SMA (Simple moving average) is a technical indicator that measures an asset’s average price over a predefined time frame. Moving averages are typically plotted as lines on financial charts overlaid on price data. Shorter-term time frames in moving averages are often used to identify near-term trend changes while longer-term time frames can describe a more “big picture” market direction.

Golden cross

A golden cross occurs when an asset’s short-term moving average crosses a long-term moving average to an upside. Conventionally, a golden cross has the 50-day moving average as the short-term MA and a 200-day moving average as the long-term MA.

A golden cross technical chart pattern is commonly interpreted by traders and technical analysts as a bullish sign, as it signals an asset’s recent average price exceeding its long-term average price.

Death cross

A death cross is a polar opposite of a golden cross. It occurs when the 50-day moving average crosses below the 200-day moving average and is often considered a bearish signal.

Golden Cross and Death Cross Timeframes

Although traditionally used with 50-day and 200-day moving averages, both golden and death crosses may employ different intervals depending on traders’ objectives. Regardless of variations in the time frame applied, the terms always refer to a short-term moving average crossing a major long-term moving average. 

It is important to note, however, that moving averages with shorter timeframes are more sensitive to random short-term price fluctuations than the ones with longer timeframes, and therefore they are more likely to cause false positives in golden and death crosses.

How to Trade the Golden Cross and the Death Cross

Both golden and death crosses are lagging indicators.  They can confirm long-term trends, but do not predict them. 

To reduce lag, investors typically use shorter time frames in the moving averages, that form the golden and death crosses. However, as mentioned above, this may come at the cost of false positives.

So how do I use golden and death crosses? As with any other technical indicators they are most effective when combined with other trading signals. Trading indicators like The Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and trading volume typically work well for confirming market moves shown by golden and death crosses. Learn more about these and other well-known trading indicators in this article.

Examples

A Bitcoin Golden Cross

On September 15, 2021, Bitcoin showed a golden cross, confirming the uptrend that began in July 2021. At the start of the bullish rally, BTC/USD was priced at around $29,000. In mid-November it climbed all the way up to $68,935.

A Bitcoin Death Cross

In November 2021 BTC/USD entered a bear market, which was confirmed by the death cross that appeared on the 14th of January 2022. In late November 2021, BTC/USD was priced at around $69,000. As of mid August 2022, it is trading at around $23,700.

How to Know if a Death Cross or a Golden Cross is Reliable?

• Context. It is important to be familiar with the asset’s previous performance and know the factors that can potentially influence its price to be able to assess the credibility of any of its market moves.

• Volume. A crossover accompanied by a high volume is largely considered more reliable than the low-volume cross.
• Price patterns. Price patterns are distinctive formations created by the movements of asset prices on a chart. For instance, price patterns such as “Double top” and “Double bottom” typically work well for confirming golden and death crosses, respectively.
• Other indicators. Golden and death crosses are considered significantly more credible when examined in the context of other indicators such as, for example, RSI and MACD.

Furthermore, It is crucial to think through an exit strategy for every entry into a trade. Setting stop-loss and take-profit orders can potentially help investors avoid losses while securing gains on a trade.

Conclusion

Golden and death crosses can serve as reliable tools for confirming long-term trend reversals. However, when assessing the credibility of the market movement exhibited by these signs, it is important to consider other trading signals, such as other indicators and trading volume.

FAQ

What is a death cross?

The death cross is a technical chart pattern that indicates the transition from a bull market to a bear market.

What is a golden cross?

The golden cross is a technical chart pattern that suggests the transition from a bear market to a bull market.

How to spot golden and death crosses?

A golden cross occurs when an asset’s short-term moving average crosses above a long-term moving average to an upside. A death cross typically appears when an asset’s short-term moving average crosses below a long-term moving average. Conventionally, golden and death crosses have the 50-day moving average as the short-term MA and the 200-day moving average as the long-term MA.

What is the difference between a golden cross and a death cross?

Golden cross and Death cross are polar opposites. While a Golden cross predicts a long-term bull market for an asset going forward, a Death cross suggests a long-term bear trend.