Death Cross and Golden Cross Reversal Signals

Introduction

As a trader or investor in the crypto market, you always look for signals. Many social media groups invite you, promising “premium” signals. But you might have noticed that even expert traders lose money in this market. Instead of wasting your money to pay those so-called premium groups, it is far better to understand the market for yourselves. What most of those group managers do is to look at charts and draw intricate lines to show you different trends and trend reversals. In this article, you will learn how to read two trend reversal indicators.

Golden Cross

A golden cross is a bullish trend reversal indicator, which shows up when a higher moving average (MA) line crosses a lower MA line. Whenever you open a price chart on a centralized exchange, you see a few things other than the charts. By default, there are 3 ascending or descending lines (depending on the ongoing price trend) that indicate moving averages.

Moving Average

The concept of the moving average lines is quite straightforward. For example, you want to find a 7-day moving average of a digital currency, just divide the sum of the 7 closing prices by 7. You can repeat the process for any length i.e. 20, 50, 200, or any time frame i.e. 15 minutes, 1 hour, 4 hours, 1 week, etc.

Spotting a Golden Cross

Technically, the 50-day MA line crosses the 200-day MA to indicate a golden cross. Analytics dictate that you should observe three distinct steps to decide the finality of a golden cross. At the outset, a downtrend or rangebound market has the 50-day MA below the 200-day MA. Secondly, the short-term MA moves above the long-term MA as a result of a trend reversal. Finally, the short-term MA needs to stay above to confirm the trend reversal. If the crossover happens momentarily, traders prefer to ignore it.

Confirmation

In addition to a durable stay of the short-term MA line above the long-term MA, volume candles also need to verify the trend reversal. Although experts believe that the golden cross indicators did accompany major trend reversals in history, a few false indicators have also appeared occasionally. Therefore, if you want to follow this indicator, it is better to verify it from other indicators like the relative strength index (RSI), moving average convergence, divergence (MACD), Bollinger Bands, etc.

Although we have explained the concept of a golden cross in terms of 50-day and 200-day MA lines, it is not necessary to stick to these values. The selection of a time frame and length depends on your trade type. Scalping or day trading requires you to select smaller values, whereas higher values suit swing trades, trend trades or spot trading. Experts agree that lower time frames and their corresponding indicators are less reliable than those of higher time frames.

Significance and Utility of Golden Cross

There are two kinds of technical indicators on the price charts: leading indicators and lagging indicators. As the terms suggest, leading indicators show you a trend before it starts. Contrarily, lagging indicators project a trend after it is underway, but it does not mean they are useless. As already hinted, no indicator in isolation can make you a successful trader. You need to consult many indicators to verify a trend. The golden cross has historically proved itself a strong tool for confirming a bullish trend. Still, it is safe to assert that a golden cross is best used when it is combined with other indicators.

Death Cross

If you have grasped the concept of a golden cross, you are all set to understand another related notion. A death cross is a bearish trend reversal indicator, which appears when a higher MA line dips below the lower MA line, so it is exactly the opposite of a golden cross.

Spotting a Death Cross

As the crossing of the 50-day MA over the 200-day MA indicated a golden cross, the crossing of the 200-day MA over the 50-day MA signals a death cross. If a token touches a new ATH and takes a sharp correction, people panic and start talking about the start of a bearish trend, but the trend reversal is not confirmed as long as a lower MA crosses over and then stays above the higher MA. So, when you grasp the concept of a golden cross and death cross, you grow mature, capable of ignoring the noise that spreads right after a price change.

The death cross has provided a bearish signal before major economic downturns in history, such as in 1929 or 2008. However, it may also provide false signals, for example, in 2016. The history of the crypto market is too short when compared to stock markets, yet there is sufficient data to prove that these two indicators are as useful in crypto as in other financial markets.

Limitations of the Indicators

A golden cross and death cross are easy enough to be understood even by a novice in the trading arena. A manipulated market may project a trend reversal indicator to entice retail traders and to make them the exit liquidity of whales in the end. Or else, the indicator may appear buy macroeconomic trends turn in favour of the opposite trend. this limitation once again proves that it is all the more necessary to follow indicator in confluence rather than relying blindly on any one indicator.

Moreover, if you apply these indicators in your trades, you do not find any clue about your exit points. Stop-loss and take-profit orders are compulsory in crypto trading lest your wallet should be liquidated. You can certainly buy on a golden cross and sell on a death cross, but these two indicators limit your profit as you may have to wait for years.

Conclusion

The sum and substance of the discussion is that a golden cross and death cross indicate reversal of trends which were going on prior to their appearance on the price charts. They are handy for traders but blind reliance on them may lead to unwanted losses.