Key Takeaways:
- A golden cross is when a short-term moving average of prices rises above a longer-term moving average. It is typically seen as a bullish trading signal.
- A death cross is when a short-term moving average of prices falls below a longer-term moving average. It is typically seen as a bearish trading signal.
- Both are simple to construct, suitable for use in an automated trading strategy, and battle-tested in other markets like stocks and forex.
- They are typically used in combination with other types of trading signals, market analysis, and risk management strategies.
What Is Technical Analysis?
Technical analysis is a method for forecasting the direction of prices. It uses trading signals based primarily on historical prices and volume data. These trading signals can be used by traders in combination with other metrics in order to decide when to buy and sell.
Golden crosses and death crosses are types of trading signals used in technical analysis.
Learn how to read crypto charts in this beginner’s guide.
What Is a Golden Cross?
A golden cross is a trading signal based on the moving averages of historical prices.
- Moving average: This is the average of the prices over a specified time period. For example, a 30-day moving average would be the average of the prices over the past 30 days. Other common periods used by traders are 20-day, 50-day, and 200-day.
- Golden cross: This occurs when a shorter-term moving average (e.g., 30-day) positioned below a longer-term moving average (e.g., 200-day) rises above (in other words, crosses) the longer-term one. When this happens, it can be interpreted as a bullish trading signal (i.e., the price may be expected to rise). This is because the cross is typically interpreted as the short-term price trend (as indicated by the shorter-term moving average) gaining momentum to rise above the longer-term trend (as indicated by the longer-term moving average). The conjecture may be that the price momentum upwards will continue.
What Is a Death Cross?
Similar to a golden cross, a death cross is a trading signal also based on the moving averages of historical prices. The difference is that a death cross occurs when a shorter-term moving average positioned above a longer-term moving average drops below the longer-term one.
A death cross is typically interpreted as a bearish trading signal (i.e., the price may be expected to drop). This is because the cross is interpreted as the short-term price trend (as indicated by the shorter-term moving average) dropping in a downward momentum to fall below the longer-term trend (as indicated by the longer-term moving average). The conjecture may be that the price momentum downward will continue.
Benefits of Golden Crosses and Death Crosses
Simple to construct
A key benefit of using golden crosses and death crosses is simplicity. The moving averages are relatively easy to construct compared to other metrics, and trading platforms offering price charts typically have built-in metrics like moving averages in which users can select to see in the charts.
Suitable for automated trading
Because the signals are purely based on historical price data, they are suitable for use in an automated trading strategy. For example, a trader could set up a trading bot to buy whenever a golden cross occurs and sell whenever a death cross occurs. In this way, the trader would not have to constantly monitor the market.
Learn about grid trading, a type of automated trading strategy based on setting price limits.
Battle-tested in other markets
Golden crosses and death crosses are already commonly used by traders in other markets, such as stocks and forex. This potentially gives crypto traders some measure of confidence when considering using them.
What to Watch Out for When Using Golden Crosses and Death Crosses
Crowded trades
If many people start using the same trading signal, the risk is that the trading signal may become less effective over time. One potential way to reduce this risk is to combine the crosses with other types of trading signals.
Past performance does not guarantee future performance
In order to have confidence that golden crosses and death crosses will have a good chance of working, traders might conduct a backtest by seeing if these signals worked in the past. However, even if the signals worked historically, it does not guarantee they will continue to do so going forward.
May be combined with other trading signals
Traders can consider combining golden crosses and death crosses with other types of technical trading signals and market analysis to improve their chances of trading success. One type of signal often used in conjunction with golden crosses and death crosses is trading volume. For example, either cross is typically seen as more reliable if accompanied by a significant rise in volume. Traders could also use risk management strategies, such as stop-losses, in case the price does not move in the expected direction after a trade is made.
Final Words — Should Users Rely on the Golden and Death Cross When Trading?
Golden crosses and death crosses are simple to construct and lend themselves well to automated trading strategies. They can also be combined with other types of trading signals, market analysis, and risk management strategies to potentially improve the chance of trading success. However, they are no guarantee that an asset’s price will rise or fall; they are only an indicator.
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Due Diligence and Do Your Own Research
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Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
