Golden Cross vs. Death Cross: How Do They Differ?
Reading Time: 3 minutesOne signals a positive market, and the other, a downturn. Can you guess which one is which?
If you want to succeed as a trader in financial markets, you have to ace technical analysis. To do so, it is important to know different indicators—chart curves, trend lines, and other candlestick patterns. One of the most crucial indicators for technical analysis is the moving average and its golden cross and death cross.
The golden cross and death cross are significant indicators that hint at long-term market trends. Both these crossover signals are based on moving averages and inform you about bull or bear runs. So let’s find out what these crossover signals mean and how they differ!
Understanding the Moving Average (MA)
To comprehend the concept behind death and golden crosses, it’s critical to understand the moving average. It is a technical indicator that is not only used in traditional markets but also in crypto. Through this indicator, you can observe the bigger picture of the market and identify potential bear or bull flags.
The indicator is widely used following trends in stocks and crypto. It calculates the average closing prices of an asset in a particular time frame. Usually, the timeframe is 10, 50, 100, or 200 days. It is the primary indicator on which the golden cross and death cross depends.
What Is a Golden Cross?
This type of crossover is a technical indicator that gives you signals about bullish trends in the market. It occurs when the long-term moving average is crossed by a short-term one indicating upward movement. A golden cross can result in a trend reversal which may change a long-term downward trend into an upward.
For instance, a golden crossover occurs when the 50-day moving average of an asset surpasses its 200-day average. When the short-term MA converges with the long-term MA in this manner, the market has a strong buying sentiment. Besides, if the asset volume increases further, it results in an upward breakout.
What Is a Death Cross?
The death cross contrasts the golden cross pattern. This type of MA crossover occurs when the short-term MA moves downward and converges with the long-term MA. This dip in short-term MA signals bearish trends in the market. It changes the upward movement in the market into a downturn.
Typically, when the 50-day MA of the asset dips and meets its 200-day MA, the death cross occurs. It triggers a sell-off in the market as the investor sentiment is negative. So, when a death crossover happens, it indicates that the asset price is likely to drop soon.
Death Cross vs. Golden Cross
These MA crossover signals have striking differences. The most obvious difference between the two is upward and downward movement. A death cross forms with a downward movement and indicates a possible bearish rally. On the other hand, the golden cross is formed with an upward movement and shows a potential bullish run.
In addition, investor sentiment is negative when a death cross is formed, and there is a sell-off in the market. In contrast, the golden cross usually produces positive sentiments among the traders, and the buying signal is strong.
Regarding your crypto trading strategy, a death crossover can be a good time to invest in an asset with a lower price. You can buy the dip and take profits when the asset gains in a bullish rally. Meanwhile, the golden cross can be the right time to make profits as the asset price is higher.
What Do Crossover Signals Mean for Trading?
Golden cross and death cross are crucial technical analysis indicators that help you follow market trends. Though they are not the only indicators for gauging market scenarios, they can guide you about long and short-term trends.
However, it is important to note that you cannot rely on a single indicator for developing an informed crypto strategy. That’s why using several indicators like RSI (Relative Strength Index), MACD (Moving Average Convergence and Divergence), Bollinger Bands, and others is critical.
Ideally, you should be using crossover signals to validate trend reversals. Then use other technical tools to make the buying and selling decisions. It will protect you from falling for a potential false crossover signal.
Reference: https://www.makeuseof.com/golden-cross-vs-death-cross-how-do-they-differ/
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