Technical Analysis – Golden and Death Crosses

Golden and death crosses are a symbol of the Western approach to technical analysis. They refer to two moving averages crossing, and the implications of such a cross are powerful. When a golden cross forms, a bullish environment is in place, while a bearish one is present when a death cross appears. The aim of this article is to define the pattern and look at some examples. As a rule of thumb, the longer the timeframe the pattern appears on, the bigger the implications for the trend to follow. In other words, a golden cross on the monthly chart should be treated as being more important than one on the hourly timeframe.

Defining the Pattern

As mentioned earlier, there are two moving averages involved. There is a debate as to whether the moving averages used should be simple ones (SMA: Simple Moving Average) or exponential ones (EMA: Exponential Moving Average). The truth is that it makes no difference. While the EMA has the advantage that it adapts quicker to changes in the current price, this advantage is almost invisible when the average is applied on longer timeframes.

* T&Cs apply to each of the offers. Click “Trade” for more details

The Golden Cross

A golden cross forms when the MA(50) moves above the MA(200). The MA(50) considers the last 50 candles to plot the value of the average, while the MA(200) considers the last 200. As a rule of thumb, when a lower moving average crosses a higher one it is a sign of the trend changing direction. The longer the period the other moving average is considering, the better for the reversal pattern. The chart below shows the MA(50) in brown crossing above the MA(200) in blue, and this is the definition of a golden cross. The time frame is the daily one on the EUR/USD pair, and it significant enough for the cross to have implications across the whole Forex dashboard.
golden cross 1
It can be seen that price hesitated a bit when it crossed the MA(200) for a day or two, exploded higher, only to retrace the move and find resistance in the average. The resistance or support level given by a moving average is a dynamic level and not a static one, which makes it even more powerful.

The Death Cross

A death cross is, of course, similar, only that it signals a bearish trend to follow. As is customary, a bearish trend is followed by a steeper declining angle than in the case of a bullish trend. This is because panic influences the way traders react, and this is in a different way than in a rising trend. A death cross on the monthly chart is far more important than one on the daily timeframe. Nevertheless, strong trends form on the daily timeframe as well, and the death cross is a confirmation that the trend has already started. It doesn’t mean that the market will not bounce anymore, but it means that the bounces should be interpreted as only spikes, and destined to be sold.
golden cross 2
The death cross above formed on the daily EUR/USD timeframe, and at the moment it appeared on the chart, the bearish trend had already started. To give you an idea about the trend I’m talking about, this is the move from the 1.40 level to the 1.03 area, and the death cross showed us when the trend started. (Actually, it showed us that the trend had already started.) The real information is that the trend started, and from the moment when the cross appeared we should look to sell any bounce. Keep in mind that a moving average is the perfect dynamic support and resistance level, and therefore the moment the price reaches the moving average, bulls or bears should step in. As a rule, the more the moving average is tested or touched by price, the weaker the trend is. I would say that the first two or three touches of the moving average deserve to be traded. Multiple testing implies that the trend is about to change.

If you want to be ahead of the game, and are involved in scalping or even short-term swing trading, look for placing multiple moving averages on a chart. You can start with the MA(20) and go all the way up to the MA(200). The domino effect should be the one to govern a trade, and the timeframes should be the ones to show the strength of a trend. The more crosses appear, the higher the probability that the trend will reverse. The longer the timeframe the cross appears on, the bigger the implications for the pair. This is why moving averages are an important tool in the overall technical analysis picture, and the longer timeframes are always favoured. The most important trend indicators will be treated in the next article, the idea being to highlight the strengths and weaknesses they have. In the end, it is important to stay profitable and for  the account to grow, no matter what the reason for buying or selling is.

.

Recommended Further Reading

Other Educational Materials